Asset price, macroeconomic variables and monetary shock

1、(研究领域：宏观经济学)asset price, macroeconomic variables and monetary shock cointegration analysis of chinese market this work was supported by daad ( german academic exchange service) and csc (chinese scholarship council), whose financial support for my phd study is gratefully acknowledged. i would like to

2、 thank prof.dr. gerhard illing at university of munich for his supervision and advices.ying deng 邓 瑛department of economics, university of munich, germanyxinhua school of finance and insurance, zhongnan university of economics and law, chinaabstract: in this paper, i investigate whether the current

3、economic activities are cointegrated with the stock price in china on the basis of the response of stock prices to macroeconomic fluctuations. i set up a hypothesis and theoretical model using the vector error correction model. this cointegration relation indicates direct long-run and equilibrium re

4、lations between asset price and four macroeconomic variables in china, i.e. industrial production, consumption expenditure, monetary supply (m1) and consumer price index. together with the result of granger causality test, it also demonstrates that stock price index and consumption index as well as

5、the monetary supply adjust to the previous equilibrium error. i also give an explanation from the point of institutional deficiencies in chinese economic and financial system, and present some policy implications from the cointegration analysis, including deepening the reform of financial system and

6、 making a low long-run inflation objective inclusive asset price as a new nominal anchor.keywords: asset price, macroeconomic variables, cointegration, monetary policy1. introductionthe relationship between stock prices and macroeconomic variables has been predominantly investigated assuming that on

7、 one hand, macroeconomic fluctuations are influential on stock prices through their effect on future cash flows and the rate at which they are discounted (chen et al.1986; geske and roll 1983; fama 1981), and on the other hand stock prices are influential on macro economy through conduction channels

8、 of monetary policy, such as wealth effect, q effect, liquidity effect etc.a number of macroeconomic factors have been used to represent risk in mature stock markets. earlier studies were mainly motivated by the arbitrage pricing theory (ross 1976), and could be perceived as global asset pricing mod

9、els (ferson and harvey 1998). some of the popular factors used in these models were industrial production, inflation, interest rates, and oil prices (hamao 1998; harris and opler 1990). the logic and methodologies used, therefore, are based on the understanding that expected returns are dependent up

10、on these risk factors. the direction of the relationship is thus assumed to be unidirectional, and from macroeconomic variables to stock returns.dynamic linkages between stock markets and macroeconomic variables are equally important, which turn to be a bi-directional relationship, or cointegrationa

11、l relationship, where stock price also plays an important role in transmitting macroeconomic policy, such as monetary policy to the real economy and influences the macroeconomic variables. fluctuations of the stock market, which are influenced by monetary policy, have important impacts on the aggreg

12、ate economy. transmission mechanisms involving the stock market are of four types: 1) tobins q effects on investment, 2) firm balance-sheet effects, 3) household wealth effects on consumption and 4) household liquidity effects mishkin, federic s.(2001), “the transmission mechanism and the role of as

13、set prices in monetary policy”, nber, working paper, no.8617.however, such linkages have been investigated only recently and extensively for developed markets (mukherjee and naka 1995; lee 1992). dynamic linkages in the emerging markets of less developed countries, such as china have been ignored, w

14、ith a few exceptions. such relationship is considerable, however, mainly due to the overwhelming influence of governments in economic activity. stock markets have been established only recently, the volume of trade is low, and company-specific information is not always timely or of high quality. the

15、refore, stock markets are inclined to influence from economic policy. the foucus of this paper is on investigating the cointegration relationship between the stock price and some macroeconmic variables in china, with a comparison to a u.s.a. in order to establish the causal ordering, granger causali

16、ty tests and vecm model are employed where, for a long-term dynamic equilibrium between asset price and macroeconomic variables, a corrected cointegration equation will be set up. and as a discussion for the result of cointegration analysis, i will finally present some important reasons from the poi

17、nt of institutional deficiencies of chinese economic and financial system and give some policy implications.2. literature reviewdynamic general-equilibrium model provides a simple framework within which one can examine the impact of fundamentals on a broad range of economic variables, including the

18、market value of firms, investment, output, and the capital stock. the framework adopted here differs from most macroeconomic analyses by adopting preferences that are not separable across states of nature; this specification (non-expected utility), following epstein and zin (1989) and weil (1990), a

19、llows a separation between risk aversion and intertemporal substitution and hence can better match asset-pricing regularities. the specification and solution of the model with these preferences may be unfamiliar to some and of independent interest. therefore, the key insights provided by the model r

20、elate to the general-equilibrium determination of consumption, investment, and dividends.2.1 consumption-based asset pricingconsumer preferencesthe representative consumers preferences (u) are defined recursively by michael kiley(2004) as follows: (2.1)where >0, 0<<1, and e is the mathemati

21、cal expectations operator, c represents consumption, and the remaining symbols represent parameters of the utility function michael t. kiley: “stock price and fundanmentals: a macroeconomic perspective”, journal of business, 2004, vol77, no.4. this recursive definition of preferences allows for a se

22、paration of the intertemporal elasticity of substitution (which equals 1 in equation (2.1) and the coefficient of relative risk aversion () as in epstein and zin(1989) and weil(1990). when equals 1, the recursion in equation (2.1) collapses to the standard expected utility case, in which the coeffic

23、ient of relative risk aversion equals the inverse of the intertemporal elasticity of substitution (i.e.,1);when differs from 1, the recursion implies that preferences are not separable across states and the coefficient of relative risk aversion differs from the inverse of the intertemporal elasticit

24、y of substitution. notably, greater than 1 implies that consumers are more risk averse than under expected utility.on the influence on consumption by stock price, the study on wealth effect has been taken on at least for 30 years. tests of the consumption capm using household-level data have shown t

25、hat the consumption of stockholders is more highly correlated with excess returns on the stock market than the consumption of non-stockholders, which suggests at least some role for the direct channel. mankiw and zeldes (1991) discover this relationship, using annual observations on food consumption

26、 from the psid. attanasio, banks, and tanner (1998) confirmed the result for a broader measure of consumption, observed at a quarterly frequency, from the uk family expenditure survey, and vissing-jørgensen (1999) and brav, constantinides, and geczy (1999)produced similar findings using the ce.

27、 moreover, andreas gunnarsson and tobias lindqvist(2000) made an empirical study on the influence of stock price and housing price on private consumption as well as inflation andreas gunnarsson and tobias lindqvist(2000), “the role of asset prices in monetary policy? a study in how central banks sho

28、uld pay attention to asset prices in monetary policy.”, finding that stock price is positive relative with private consumption with a lag of 3 to 6 months, and the past stock price plays a more important role than the current price. lettau, martin, ludvigson, sydney and charles steindel(2001) found

29、an obvious wealth effect in usa, but were uncertain about the value of wealth effect. charles goodhart and boris hofmann (2001) regarded that charles goodhart and boris hofmann (2001), “asset prices, financial conditions and the transmission of monetary policy”, paper prepared fro the conference on

30、“asset prices, exchange rates, and monetary policy”, stanford university, march 23, 2001., value of wealth effect depends on the percentage of financial asset in the total wealth hold by private sector. the historic data shows that equity asset has gained an increasing percentage in recent years.2.2

31、 production-based asset pricinga production technology defines an “investment return,” the (stochastic) rate of returnthat results from investing a little more today and then investing a little less tomorrow.with a constant return to scale production function, the investment return should equal the

32、stock return, data point for data point. the major result is that investment returns functions only of investment data are highly correlated with stock returns, which is an empirical result for developed countries. the prediction is essentially a first-differenced version of the q theory of investme

33、nt.the stock return is pretty much the change in stock price or q, and the investment return is pretty much the change in investment/capital ratio. thus, the finding is essentially a first-differenced version of the q theory prediction that investment should be high when stock prices are high. this

34、view bore up well even through the gyrations of the late 1990s.one central argument of james tobins seminal 1969 journal of money, credit and banking paper was that “financial policies” can play a crucial role in altering what later became known as tobins q, the market value of a firms assets relati

35、ve to their replacement costs. tobin emphasized that, in particular, monetary policy can change this ratio. this 1969 jmcb paper together with another of his contributions (tobin 1978) became a key element in the formulation and understanding of the stock market channel of monetary policy transmissi

36、on.when internet stock prices were high, investment in internet technology boomed. pastor and veronesi (2004) show how the same sort of idea can account for the boom in internet ipos as internet stock prices rose. the formation of new firms responds to market prices much as does investment by old fi

37、rms.the q theory also says that investment should be high when expected returns (the costof capital) are low, because stock prices are high in such times. zhang (2004) uses the q theory to “explain” many cross-sectional asset pricing anomalies. firms with high prices (low expected returns or cost of

38、 capital) will invest more, issue more stock, and go public; firms with low prices (high expected returns) will repurchase stock. we see the events, followed by low or high returns, which constitutes the “anomaly.” mertz and yashiv (2005) extended the q theory to include adjustment costs to labor as

39、 well as to capital. hiring lots of employees takes time and effort, and gets in the way of production and investment. this fact means that gross labor flows and their interaction with investment should also enter into the q-theory prediction for stock prices and stock returns.2.3 monetary frictions

40、/monetary shocks and asset pricemishkin presented the following four channels as how stock market conducts monetary shock through asset price into the real economy mishkin, federic s.(2001), “the transmission mechanism and the role of asset prices in monetary policy”, nber, working paper, no.8617: (

41、1) stock market effects on investment.(2) firm balance-sheet effects(3) household liquidity effectslikelihood of financial distress where indicates a rise in consumer durable expenditure and a rise in residential housing spending.(4) household wealth effectswhere and indicate household wealth and co

42、nsumption rises. research has found this transmission mechanism to be quite strong in the unite state, but the size of the wealth effect is still controversial.in macroeconomics, monetary shocks and monetary frictions are considered by many to be an essential ingredient of business cycles. they shou

43、ld certainly matter at least for bond risk premia. (see piazzesi 2005 for the state of the art on this question.) coming from the other direction, there is now a lot of evidence for “liquidity” effects in bond and stock markets (see cochrane 2005 for a review), and perhaps both sortsof frictions are

44、 related.recent work on the relationship between stock returns and macroeconomic variables has employed techniques, such as adf, johansen cointegration test, var and vecm, which take into account dynamic linkages. lee (1992) investigated causal relations and dynamic interactions among asset returns,

45、 real activity, and inflation in the post-war united states. lees main results indicate that real stock returns help explain movements in real activity. lees findings are compatible with famas(1990) explanation for negative stock return-inflation relationship. martin lettau and sydney ludvigson(2001

46、) using a cointegrated var method, concluded that fluctuations in consumption-wealth ratio are strong predictors of both real stock returns and excess returns over a treasury bill rate martin lettau and sydney ludvigson, “consumption, aggregate wealth, and expected stock returns”, the journal of fin

47、ance, vol.lvi, no.3, june 2001. fabio panetta (2002) analysis the stability of the relation between italian equity returns and macroeconomic factors using the methodology suggested by dimson and marsh(1983), showing that the instability is really a serious problem. the sensitivities to the macroecon

48、omic variables are highly unstable for both individual securities and portfolios fabio panetta, “ the stability of the relation between the stock market and macroeconomic forces”, economic notes by banca monte dei paschi di siena spa, vol 31, no-3-2002, pp.417-450. in recently years, research on suc

49、h a cointegration relation in developing countries such as china has also come up. research work of yi gang and wang zhao (2002) found that quantity of currency and inflation depends not only on the price of commodities and services, but also on the stock market. sun huayu and ma yue(2003) use a rec

50、ursive var method to analylize the relation between stock price and gdp as well as cpi, finding that stock price doesnt play a role on gdp, neither dose the monetary supply on stock market. yan yanyang, li zhi and xu junping detect a long-term cointegration between stock price and bond, export, dome

51、stic credit and short-term interest rate using vecm. but they didnt included all the variables in a long-term cointegration equation, and not provide with an explanation for such a relationship, either.3. hypothesis and theoretical modelthis study will use the johansen cointegration test, granger ca

52、usality test and the vecm (vector error correction model) to investigate the relation between stock market prices and underlying macro variables. if economic variables are significantly and consistently priced in stock market returns, they should be cointegrated. this cointegrated relation between s

53、tock market prices and underlying factors is a necessary condition of the equilibrium model of stock market returns as well as the realization of the asset price channel of monetary policy transmission.the cointegration analysis requires two steps: the unit-root test to determine their nonstationari

54、ty and, when the results indicate that the first-differenced series of each variable are stationary, a subsequent test to determine whether these two variables are cointegrated.the test of the unit-root hypothesis was initially introduced by dickey and fuller (1979, 1981). to test the unit-root hypo

55、thesis, the following form of the augmented dickey-fuller test (adf) is used: (3.1)where= the logarithm of the variable in period t,t= time trend,= - = i.i.d. disturbance with mean 0 and variance 2, that is et ni(0, 2).along with the null hypothesis that forecasts follow a random walk, the relevant

56、critical values for the t statistics of the coefficient on the lagged level (h0: =0) are given in fuller (1976). this study tests whether there are unit roots in chinese stock market price index and macroeconomic variables. following these findings, this study will test for cointegration between sto

57、ck markets price and macroeconomic variables.finally, this study will investigate the causal relations between stock market price index and macroeconomic variables (granger, 1981, 1988; granger and weiss, 1983). if a pair of variable series is cointegrated, the bivariate cointegrated system must hav

58、e a causal ordering in at least one direction. therefore, if the results show that the stock market causes the economic variables, it can be claimed that stock price variability is fundamentally linked to economic variables and the change in stock price lags or leads these economic activities. in co

59、nventional regression models, one would typically difference nonstationary variables before using them in a significant test. although this is acceptable, differencing time-series may result in a loss of information about the direct long-run relation between dependent and independent variables. fortunat