Influences of Macroeconomic Variables on Stock Market in China: An Empirical Analysis

This paper investigates the influences of macroeconomic variables on the stock market in China. We use Granger causality tests, impulse response functions, and variance decompositions to examine how fundamental macroeconomic variables, such as output proxied by electricity generation, inflation, money supply, and short-term interest rate affect the Shanghai Stock Exchange Composite Index. Our estimation results indicate that variables that measure macroeconomic activity, such as output growth and inflation, have no statistically significant impact on stock returns. Moreover, the stock returns do not respond to changes of monetary policy variables such as money supply and short-term interbank offered rate. This implies that monetary policy does not exert significant influences on stock returns. In sum, the performance of the China stock market does not reflect macroeconomic fundamentals