An Empirical Study On The Relation Between Stock Returns And Macroeconomic Variables In China

Using monthly data of532stocks from1998to2012in Chinese market, thisthesis analyzes the relation between stock returns and a series of macro variablesthrough Partial Least Squares regression and principal component analysis. Importantresults tell us that stock market liquidity and monetary factors are the key drivingforces for the stock returns. Price indexes rank the third to interpret stock returns, andproduction and consumption factors play a significant but less important role inexplaining the stock returns, especially industrial production is negatively correlatedwith stock returns. In the macro economy falling period (2008-2012), demand factorsand monetary factors are the key driven force for the stock returns. The explanatorypower of stock liquidity factor is a little bit weakened.On the other hand, stock market liquidity factors also can be well explained byall the532stocks. Monetary factors and GDP factors can be explained by part of thestocks. After all above, I found that stocks in cyclical industry play more importantroles in explaining the macro variables and the explanatory power of non-cyclicalindustry stocks is relatively weak. Changes of macro factors have stronger correlationwith the change of cyclical stock returns compared with that of non-cyclical stockreturns.