The Relationship Between the Chinese Stock Market, the US Stock Market, and Some Other Economic Indexes Under the COVID-19 Pandemic

Abstract

The COVID-19 outbreak has had a huge impact on all sectors of the world, especially the economy. Among all the economic indicators, the stock market indexes are particularly important, because the stock markets anticipate the future economic change and reflect investor confidence and thus may be the barometer of the overall economy. The Chinese and US stock markets are the most important stock markets. Because New York Stock Exchange (NYSE) and National Association of Securities Dealers Automated Quotations (NASDAQ) have the greatest market cap worldwide. And Shanghai Stock Exchange (SSE) and Hong Kong Stock Exchange (HKSE) can obviously show the conditions of economy in the mainland of China and East Asia. We collected the daily increase or decrease indexes of the U.S. and China stock markets to study their relationships and how they are affected by the pandemic. To study this problem, this paper uses three methods, including Local Similarity Analysis (LSA), Least absolute shrinkage and selection operator (LASSO) and Markov chain. We calculate the correlation between the U.S. stock indexes and China stock indexes with LSA and analyze the possible factors which lead to these correlations. LASSO is used to find out other economic indexes which affect the U.S. and China stock markets and test whether these indexes can predict the trend of future markets. Lastly, Markov chains can be used to analyze the effects of the day to the next day transmission in stock markets. We find that there is a high correlation between the U.S. and the China stock using LSA, especially, from Jan.10 to Feb.10. We find that Shanghai Stock Exchange Composite Index (SSEC) and NASDAQ are correlated to the Standard and Poor’s 500 Index (S&P500) in the US market. S&P500, confirmed cases of COVID-2019 in China (Chinese cases), USD to CNY exchange rate are correlated to the SSEC in the Chinese market. Using these indexes, the future indexes of the U.S. stock market can be predicted at a PCC correlation, the highest is 0.44 and the lowest is 0.24 for the China market. LASSO shows that the U.S. market can be more accurately predicted by the indexes. The estimated Markov models of the two stock markets are pretty similar, i.e. the probability that the value of the U.S. stocks increases two days in a row is 13.40% and the Chinese market is 11.34%. To sum up, we find that the two stock markets are highly correlated under the Covid-19 pandemic despite from some differences.