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Macroeconomic variables for predicting bear stock markets of Taiwan and China

Tran Van Phuong Duong (Department of Finance, National Yunlin University of Science and Technology, Douliou, Taiwan)
Szu-Hsien Lin (Department of Southeast Asian Economy, Trade and Digital Finance, TransWorld University, Douliou, Taiwan)
Huei-Hwa Lai (Department of Business Administration, Chaoyang University of Technology, Taichung, Taiwan)
Tzu-Pu Chang (Department of Finance, National Yunlin University of Science and Technology, Douliou, Taiwan)

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 29 April 2021

Issue publication date: 24 February 2023




This research examines how macroeconomic variables can precisely predict bull/bear stock markets in China and Taiwan.


This paper adopts a two-state Markov switching model to characterize the bull and bear markets spanning from 1994 to 2019 and then conduct a bear stock market predictability test by running regressions between the filtered probabilities of bear markets and a series of macroeconomic variables in turn at different horizons of 1, 3, 6, 12 and 24 months.


This paper shows that inflation rates, changes in real exchange rates, and foreign currency reserve growth are key predictors of bear markets in China, while term spreads, unemployment rates and foreign reserve growth are major factors that can predict bear markets in Taiwan. Remarkably, industrial production growth does not have predictive power for bear markets, which may suggest emerging markets are driven by fund flows rather than real economic activities. Besides, the impact directions of foreign currency reserve growth are opposite, which may be due to different proportions of the financial accounts in their balance of payments.

Practical implications

In practical respect, this paper provides market participants the usefulness, impact direction and implications of bear market predictors when building their market-timing strategies in China and Taiwan stock markets. The government institutions may also thereby make appropriate policies to prevent huge stock market downturns and serious drawbacks.


It highlights the “fund-driven market hypothesis” and “foreign currency reserve effects” that commonly dominate Taiwan and China stock markets since both are highly affected by international funds.



The authors would like to thank the editor and anonymous reviewers for their feedbacks and insightful comments for this research. Their valuable comments greatly improve the clarity and quality of this paper.


Duong, T.V.P., Lin, S.-H., Lai, H.-H. and Chang, T.-P. (2023), "Macroeconomic variables for predicting bear stock markets of Taiwan and China", International Journal of Emerging Markets, Vol. 18 No. 2, pp. 273-295.



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