Dynamics in the co-movement of economic growth and stock return: comparison between the United States and China

Yu Jiang

doi:10.1080/1331677x.2019.1642786

Abstract

The performance of the stock market is usually regarded as the barometer of economic growth and stock return and economic growth are, therefore, believed to co-move. However, the co-movement may exhibit different characteristics in various economic systems. This paper studies the co-movement of stock return and economic growth in two representative countries, the U.S. and China, with entirely different economic systems. The degree of co-movement is measured by the correlation of stock index return and G.D.P. growth rate and a time-varying copula model is applied to capture the dynamic characteristics of the co-movement. Empirical results show that the co-movement of stock return and economic growth is relatively strong but fluctuant in the U.S. and is relatively weak but stable in China. The differences in the co-movement can be interpreted by different economic growth modes in the U.S. and China.

Highlights

Speaking, the performance of equity investments is inextricably linked to economic growth because the source of value for equity investments is driven by economic activity (Cornell, 2010)
We investigate the co-movement of stock return and economic growth in the U.S and China
The degree of co-movement is quantified by the correlation of stock index return and G.D.P. growth rate

Summary

Introduction

The performance of equity investments is inextricably linked to economic growth because the source of value for equity investments is driven by economic activity (Cornell, 2010). The performance of stock market is usually regarded as the barometer of economic growth and the stock return and the economic growth are believed to co-move to some extent. The co-movement of stock return and economic growth can play an important role in macroeconomic policy-making and individual investment decision-making. From the perspective of macroeconomics, the government can consider the trend of stock market as the predictor of economic growth and adjust macroeconomic policies in advance according to the co-movement of stock return and economic growth. From the perspective of individual investments, investors can consider the trend of economic growth as the indicator of investment decisions and adjust investment strategies timely according to. It is worthy and meaningful to study characteristics of the co-movement of stock return and economic growth in a country

Methods

Findings

Discussion

Conclusion