The Research On Return Correlation Between The Stock Market And Bond Market In China

Stock market and bond market are two important components of finance market. In the period of rapid development of China’s finance market, the effectiveness of finance market internal financial resources allocation and the possibility of the two markets to achieve the best allocation of the investment portfolio will determine the whole finance market’s efficiency and the process of reform. From the reality of our country’s situation, the development of stock market and bond market in direct financing system is not balanced, and it has become one of the serious problems. Whether there is correlation between stock market and bond market will reflect the effectiveness of the whole finance market and monetary policy. Therefore, the study on crrelation of China’s stock market and bond market, a correct understanding of the mechanism of interaction between the two markets, will be a key of China’s financial system reform and further development. It can influence investors’investment decisions, and help investors to reap larger diversification benefits as well. It also can help policymakers to develop sound policies, because policies directed primarily at one component of such portfolio could have unintended consequences for the other. Therefore, it’s important to analyze return correlation between stock and bond markets.The purpose of this thesis is to explore whether there is return correlation between stock and bond market, and what factors affect the relationship. First, this thesis makes a introduction of basic theories, including the Efficient Markets Hypothesis, Behavioral Finance and Coherent Market Hypothesis, and sets forth the mechanism of correlation. And then the thesis analyzes factors’ impact on the return correlation, explore interest rates, inflation level, monetary policy, fiscal policy, exchange rates, macroeconomic condition and investor sentiment’s effects on stock and bond markets return correlation theoretically.Then the thesis takes the empirical study. Taking the reality into account, the thesis use the data beginning with2007when the reform of the shareholder structure completed basically. Based on the tidied data of the indicators selected, the empirical results show that the returns of stock and bond markets interacts in the long run through the establishment of vector autoregressive model impulse response function, variance decomposition and Granger causality test. And then to make the study on factors which effecting the correlation, the thesis establish the vector autoregressive model after making ADF test. Then Using impulse response function and variance decomposition to test the influence of factors to the model. Finally, Granger causality test find the Granger causality relationship between the return correlation and every factor. The result indicates that almost all factors can affect the return correlation between stock market and bond market and there is a phenomenon of lag in the effect. The main influencing factors are inflation level, the amount of loan, PMI and closed-end fund discount.The empirical results concerning the impacts which the factors have on the return correlation between the stock and bond markets are almost consistent with the theoretical analysis. The returns of stock and bond markets interacts in the long run. Almost all factors affect the return correlation, but the level is different from each other. Based on the theoretical analysis and empirical research, and taking into account the advanced experience of mature foreign security markets, some policy suggestions in regard to the development of Chinese security market are brought forward.