The time-varying characteristics of the Chinese financial cycle and impact from the United States

ABSTRACT

Although there have been many empirical studies about the financial cycle since the financial crisis of 2008, few have analysed the structural changes in the Chinese financial cycle over time. The Chinese financial development process is short, and it is difficult to obtain accurate results on the measurement of the financial cycle. Based on wavelet analysis, this paper analyzes the time-varying characteristics of the Chinese financial cycle and the relationship between the financial and business cycles. In addition, we measure the impact from the United States. This paper draws three conclusions. Firstly, in terms of the characteristics of cycles, the existence of Chinese business cycle and financial cycle is proved, while the credit cycle, leverage cycle, stock market cycle and property cycle are quite different. Specifically, China has a 5.8-year credit cycle, an 8-year stock market cycle, 3.4-year and 12-year business cycles and a 15-year leverage cycle. Secondly, the financial cycles can serve as leading indicators of the business cycle, though the relationships between them are change overtime. Finally, the United States has a significant impact on the Chinese financial cycle with a ‘decoupling-recoupling’ effect, which is mainly reflected in the leverage cycle and the stock market cycle.     

Finance–Growth Nexus and the P‐bias: Evidence from OECD Countries

Recent studies provide new empirical evidence confirming that financial development is linked to economic growth in OECD countries. Using new dynamic panel regression techniques, these appraisals indicate that within the group of high‐income countries stock market size as a measure of financial advancement contributes significantly to overall economic activity. Applying the same advanced techniques, this paper questions this conclusion by showing that the findings of these studies seem to be not only not robust with respect to adding new observations but also likely to be plagued by a severe price bias which belittles the information content of the used financial indicator (stock market capitalization). We provide evidence that anticipative price effects (i.e. expectations of future growth, reflected in current stock prices) may be driving the statistical relationship between stock market activities and economic growth in high‐income countries to a much larger extent than recent analyses of the finance– growth link in OECD countries suggest .     

Cyclical Dynamics of the Turkish Economy and the Stock Market

Abstract

We analyze the cyclical dynamics of the Turkish economy and the stock market as well as their interactions. We use hidden Markov models that are robust to parameter instability arising from major shifts in economic policy, which have been typically observed in the Turkish economy. These models provide estimates of turning points for the growth, business, and stock market cycles. We identify three states of growth cycles and two states of business cycles in Turkey characterized by different mean estimates. We find that the economy went through five recessions since 1987. Crises are characterized by sharp drops in economic activity and are preceded by slowdowns. These crises are typically followed by strong recoveries during which the economy grows above its long-run average rate. We show that the Turkish stock market goes through three regimes having distinct risk-return dynamics. Bear markets associated with negative returns precede every recession with an average lead time of three quarters, suggesting that the stock market may be a useful forward-looking indicator of the Turkish economy.     

大国经济体金融结构变迁的理论思考*

近30年来，无论是从规模指标、行为指标还是效率指标着眼，相对于银行而言，大国经济体的股票市场均变得更大、更活跃并更有效率，进而其金融结构总体上呈现向市场导向演进的态势。金融结构的这一演变态势并不因初始金融模式的差异而不同，存在较为显著的趋同现象。经济增长模式从增长型发展向创新型发展的转型是开放型大国经济体金融结构演变的内在根源，而开放和技术变革则是引发这些国家强化或趋同市场主导型金融模式与增长模式转型的直接动因。随着中国经济环境的变化，其现有银行主导型金融结构面临着巨大挑战，股票市场在金融体系中的地位急需提升。\     

FINANCIAL DEVELOPMENT ON GROWTH CONVERGENCE

This paper investigates whether the impacts of financial development on growth convergence vary with the stage of real development. We implement this analysis through the instrumental variable threshold regression approach proposed by Caner and Hansen. Our empirical evidence shows that financial intermediary development leads to long‐run convergence in growth of both economic activity and productivity. Moreover, such convergence‐enhancing effects of financial intermediation are stronger for less‐developed countries than for the more industrialized. In addition, the data reveal that stock market development assists growth convergence only in low‐income countries.     

Financial systems and economic growth in South Africa: a dynamic complementarity test

This study examines the relationship between banks, stock markets and economic growth in South Africa. The study attempts to answer one critical question: are stock markets and banks complementary to one another in the process of enhancing economic growth? The complementarity between the stock markets and banks is examined by including a set of interactive terms in a standard growth model, alongside bank development and stock market development proxies. In order to test the robustness of the results, three proxies of stock market development have been used, namely stock market capitalization, stock market traded value and stock market turnover – against the ratio of bank credit to the private sector, a proxy for bank-based financial development. The economic growth is, however, proxied by real GDP per capita. Using the ARDL-Bounds testing procedure, the study finds that the complementarity between stock market development and bank-based financial development is weak and sensitive to the proxy used to measure stock market development.     

Financial market development,global financial crisis and economic growth: evidence from developing nations

Emerging and frontier markets in Africa have witnessed various economic and financial reforms aimed at integrating the domestic markets into the global financial market to attract investment. Whether these reforms promote high economic growth remains inconclusive. The paper applies the pooled mean group estimation technique to empirically re-investigate the link between financial market development, global financial crisis, and economic growth in selected African economies. The results strongly support our hypotheses that stock market and banking sector development promotes economic growth in the selected countries. Moreover, financial crisis reduce the positive effects of both the stock market and banking sector developments on economic growth. The study suggests that both the banking sector and stock market are important to deliver the long-run economic growth that the African region desired. Moreover, effort should be made to enact policy measures that would ensure development of the stock market which has received inadequate attention.     

景气循环下不动产市场对金融控股 公司股价回报之影响*

本文主要目的在于调查中国台湾地区景气循环变化对于金融产业股价回报的影响,同时引入不动产市场因子进行分析,研究对象将2003年1月至2011年6月中国台湾证券交易市场所有上市银行类股作为研究样本。与过去研究不同,本文进一步划分公司群体为金控与非金控公司进行探讨。实证结果显示在景气扩张时期,因为投资人普遍追求短期房价获利的投机心理,因此,呈现出不动产市场活动效果不显著的现象。反之,在资金成本与房市购买意愿变化下,不动产市场状况与金控公司具有反向的关联。此外,当市场处于景气扩张时期时,金融产业的动量效应较为明显,显现市场投资人较易存在不理性的投资行为,倾向于持有现货进行投机行为,故动量效应在景气扩张时期较衰退时期的效果大。在货币市场方面,当市场处景气扩张时,非金控公司具有负向的利率敏感性,但金控公司则未达统计的显著水平。     

Non linear and asymmetric linkages between real growth in the Euro area and global financial market conditions: New evidence

This paper deals with transition mechanisms through which financial market conditions affect real economic growth in the Euro area. The informational content of financial variables for predicting real economic growth is assessed, allowing for asymmetric responses to shocks. A nonlinear framework is developed based on a smooth transition model for which the effects of shocks can vary across business cycles when financial indicators modify both the endogenous and state variables. Global financial variables are shown to significantly affect real growth in the Euro area, particularly during periods of recession. Changes in stock market index and yield slope have asymmetric effects on real growth. In recessionary periods, the slope of the US yield curve does not have a significant impact on growth in the Euro area.     

A Literature Review of Social Mood

Emotions exert a significant influence on financial behavior. The "socionomic hypothesis" posits social mood, the collective mood of individuals, as a primary causal variable in financial and social trends. In order to provide a scientific basis for the study of social mood, this article reviews psychological research on major mood-related elements of personality: affect, motivation, and personality traits. We examine the structure and functions of these core personality dimensions, and discuss research on contagion processes by which individuals' moods spread and manifest in a collective social mood. We also address implications for financial and economic behavior. Social mood is rooted in empirically established personality dimensions that are fundamental to human nature, and can influence financial outcomes.     

The relationship between South Asian stock returns and macroeconomic variables

This article investigates whether economic variables have explanatory power for share returns in South Asian stock markets. In particular, using data for four South Asian emerging stock markets over the period 1998–2012, the article examines the influence of a selection of local, regional and global economic variables in explaining equity returns; most previous studies that have examined this issue have tended to focus on only local and/or global factors. Important factors are identified by distilling the macroeconomic variables into principal components. Economic activities, real interest rates, real exchange rates and the trade balance represent local factors. Regional factors are represented by interregional trade and regional economic activity while global factors are represented by world financial asset returns and world economic activity. The vector autoregression results suggest that the South Asian markets examined are not efficient. Both local and regional factors can directly and indirectly explain Bangladeshi, Pakistani and Sri Lankan stock returns while the lagged returns of the Pakistani stock market and world economic activity can explain Indian stock returns.     

Capital flows to an emerging financial market in Turkey

Increased globalization in financial markets implies that the percentage of all shares under foreign ownership in domestic stock markets has been rising. Speculative attacks on the foreign exchange market in February 2001 led to deep economic crisis in Turkey. This article will explore various indicators of the financial crisis in Turkey based on a macro-model. The foreign share of the domestic economy is a key variable to establish the degree of vulnerability during a financial crisis. An empirical investigation shows that the percentage of shares owned by foreigners on the Istanbul Stock Exchange (ISE) has been increasing since 1995 and is currently about 50 percent of the total. Furthermore, the general index of stock market prices in 1999 was at its highest level since 1995. This would imply that the general price index of the stock market is another strong indicator of an impending financial crisis. An empirical investigation of Turkish data based on a theoretical model is presented in this paper. An unexpected capital outflow would certainly cause exchange rate fluctuations, balance of payments problems, and international debt crisis. Hot money inflows boost share prices and keep the real exchange rate high. However, short-term stay of capital implies a sudden capital outflow that creates financial crisis, which results in international debt crisis. This in turn leads to a further increase in loans from the International Monetary Fund (IMF). Relatively high stock market prices may suggest an impending financial crisis. Using Turkish stock market price data, an impending financial crisis can be statistically predicted.     

International Financial Liberalization and Economic Growth

This paper pulls together existing theory and evidence to assess whether international financial liberalization, by improving the functioning of domestic financial markets and banks, accelerates economic growth. The analysis suggests that the answer is "yes." First, liberalizing restrictions on international portfolio flows tends to enhance stock market liquidity. n turn, enhanced stock market liquidity accelerates economic growth primarily by boosting productivity growth. Second, allowing greater foreign bank presence tends to enhance the efficiency of the domestic banking system. In turn, better-developed banks spur economic growth primarily by accelerating productivity growth. Thus, international financial integration can promote economic development by encouraging improvements in the domestic financial system.     

A Study of Social Network Effects on the Stock Market

Consumer confidence is an economic indicator that measures the degree of optimism that consumers feel about the overall state of the economy as well as their personal financial situation. The authors measure consumer sentiment via analysis of social networks and show that such sentiment affects stock prices; specifically, the S&P 500 and the Dow Jones Industrial Average. Shiller, Fischer and Freidman [1984], Fisher and Statman [2003], and Bremmer [2008] also examine the influence of consumer sentiment, measured from Conference Board data, on the stock market. The authors add to this literature by creating a measure of consumer confidence by utilizing Twitter data and by examining the relationship between our measure of consumer sentiment and the S&P 500 and the Dow. They implemented lexicographic analysis of Twitter data over a three-month period and found that talk intensity of economic issues not only causes shifts in the daily stock market prices, but also has a significant negative effect.     

Investor sentiment,variance risk premium and delta-hedged gains

Delta-hedged gains are supposed to be negative and represent a volatility risk premium. Using a sample of Standard & Poor 500 index options from 2006 to 2009, this study documents two anomalies that cannot be explained by the volatility risk premium. First, delta-hedged gains are more negative for out-of-money options than for at-the-money options. Second, delta-hedged gains are significantly positive during financial crisis period. We propose a behavioural explanation in which both option prices and stock prices are affected by investor’s sentiment, but pessimistic sentiment has a greater impact on stock market than option market. This asymmetric response to pessimistic mood in turn affects the relative expensiveness of option prices.     

In defense of fundamental analysis: A critique of the efficient market hypothesis

Conclusion The main shortcomings of the EMH are similar to those of the long-run competitive theories that focus exclusively on equilibrium outcomes while ignoring the entrepreneurial activity that generates those outcomes. The EMH gives the impression that there is a difference between investing in the stock market and investing in a business. However, the stock market doesn't have alife of its own. The success or failure of investment in stocks depends ultimately on the same factors that determine success or failure of any business. Statistical tests that supposedly validate the EMH framework are based on a flawed method and a failure to understand that the main cause behind the instability in financial markets is the monetary policies of the central bank. Frank Shostak is chief economist at Ord Minnett Jardine Fleming Future, Sydney, Australia. The views expressed herein are his own and do not necessarily represent those of Ord Minnett Jardine Fleming Futures. The author wishes to express his gratitude to the very helpful comments of two anonymous referees.     

Idiosyncratic risk matters! A regime switching approach

The evidence on the inter-temporal relation between idiosyncratic risk and future stock returns is conflicting and confusing. We shed new light on the issue using a more flexible econometric approach based on [Hamilton, J.D. 1989. A new approach to the economic analysis of nonstationary time series and the business cycle. Econometrica, 57, 357–384.] regime switching model that accommodates the parameter instability of the forecasting relation between returns and financial variables. We find strong evidence suggesting that idiosyncratic risk is related to future stock market returns only in the low variance regime.     

ASIAN FINANCIAL LINKAGE: MACRO‐FINANCE DISSONANCE

How are Asian financial markets interlinked and how are they linked to markets in developed countries? What is the main driver of fluctuations in Asian financial markets as well as real economic activity? To answer these questions, we estimate the spillover index proposed by Diebold and Yilmaz and gauge the degree of interaction in both financial markets and real economic activity among Asian economies. We first show that the degree of the international spillover in stock markets is uniform, irrespective of the groups of countries concerned, such as the G3 and ASEAN4. This suggests the importance of global common shocks in stock markets. We then discuss the macro‐finance dissonance. In stock and bond markets, the United States has been the main driver of fluctuations. However, China has emerged as an important source of fluctuations in real economic activity.     

Sign and phase asymmetry: News, economic activity and the stock market

In this paper, we present a general model of the joint data generating process underlying economic activity and stock market returns allowing for complex nonlinear feedbacks and interdependencies between the conditional means and conditional volatilities of the variables. We propose statistics that capture the long and short run responses of the system to the arrival of news, conditioning on the sign and time of arrival of the news. The model is applied to US data. We find that there are significant differences between the short and long run responses of economic activity and stock returns to the arrival of news. Moreover, for certain classifications of news, the respective responses of economic activity and stock returns vary according to the nature of the news and the phase of the business cycle at which the news arrives.     

An Empirical Note on the Influence of the US Stock Market on Australian Economic Activity

This paper empirically examines the impact of the US stock market on Australian economic activity as one explanation of the strong correlation in the Australian and US business cycles. It is found that both the US and Australian share markets appear to have a significant impact on Australian activity.