Does macroeconomic uncertainty really matter in predicting stock market behavior? A comparative study on China and USA
China Finance Review International
ISSN: 2044-1398
Article publication date: 18 May 2020
Issue publication date: 22 September 2020
Abstract
Purpose
The study aims to analyze the interaction between macroeconomic uncertainty and stock market return and volatility for China and USA and tries to draw some invaluable inferences for the investors, portfolio managers and policy analysts.
Design/methodology/approach
Empirically the study uses GARCH family models to capture the time-varying volatility of stock market and macroeconomic risk factors by using monthly data ranging from 1995:M7 to 2018:M6. Then, these volatility series are further used in the multivariate VAR model to analyze the feedback interaction between stock market and macroeconomic risk factors for China and USA. The study also incorporates the impact of Asian financial crisis of 1997–1998 and the global financial crisis of 2007–2008 by using dummy variables in the GARCH model analysis.
Findings
The empirical results of GARCH models indicate volatility persistence in the stock markets and the macroeconomic variables of both countries. The study finds relatively weak and inconsistent unidirectional causality for China mainly running from the stock market to the macroeconomic variables; however, the volatility spillover transmission reciprocates when the impact of Asian financial crisis and Global financial crisis is incorporated. For USA, the contemporaneous relationship between stock market and macroeconomic risk factors is quite strong and bidirectional both at first and second moment level.
Originality/value
This study investigates the interaction between stock market and macroeconomic uncertainty for China and USA. The researchers believe that none of the prior studies has made such rigorous comparison of two of the big and diverse economies (China and USA) which are quite contrasting in terms of political, economic and social background. Therefore, this study also tries to test the presumed conception that macroeconomic uncertainty in China may have different impact on the stock market return and volatility than in USA.
Keywords
Acknowledgements
Authors are very thankful to the anonymous reviewers for their invaluable comments in improving the quality of this article. We are also thankful to the support extended by the Department of Business Administration, Sukkur IBA University, Sindh-65200, Pakistan.
Citation
Abbas, G. and Wang, S. (2020), "Does macroeconomic uncertainty really matter in predicting stock market behavior? A comparative study on China and USA", China Finance Review International, Vol. 10 No. 4, pp. 393-427. https://doi.org/10.1108/CFRI-06-2019-0077
Publisher
:Emerald Publishing Limited
Copyright © 2020, Emerald Publishing Limited