Stock Market Cycle and Business Cycle in China: Evidence from a Bootstrap Rolling Window Approach

Xiao-Lin Li (), Yi-Na Li () and Lu Bai ()
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Xiao-Lin Li: Department of Finance, Ocean University of China
Yi-Na Li: Department of Finance, Ocean University of China
Lu Bai: Department of Finance, Ocean University of China

Review of Economics & Finance, 2019, vol. 17, 35-50

Abstract: This paper investigates the causality between the stock market cycle and business cycle in China using the bootstrap full-sample causality test and sub-sample rolling-window causality test. The full-sample causality test suggests a unidirectional causality from the stock market cycle to the business cycle in China. However, we find the parameters in the VAR models consisting of the full-sample data are unstable by conducting a parameter stability test. This implies that the results from the full-sample causality test cannot be relied upon. Consequently, we turn to employ a bootstrap rolling window approach which can identify the time-varying feature in the causality. Using a 24-quarter window size, we do find that the bi-directional causality between the stock market cycle and business cycle in China does exhibit substantial time variations. Moreover, the causal effect of the stock market cycle on the business cycle is much weaker than that of the business cycle on the stock market cycle. In other words, stock market volatility is not the main factor that affects the business cycle formation and development in China. These findings have important implications for policy makers and investors.

Keywords: Stock market cycle; Business cycle; Time variations; Bootstrap; Rolling window (search for similar items in EconPapers)
JEL-codes: C22 E32 G10 (search for similar items in EconPapers)
Date: 2019
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