The effects of economic and political events on the behaviour of Stock Market Index in China

As an emerging stock market and under the centrally control of the Government, the Chinese Stock Market has been identified as being partially segmented from global capital markets. As a consequence, the local economic factors and the Government policies are the primary influences of the movements of the Chinese Stock Market Indices. This article seeks to address the question of whether local macroeconomic variables and the political events have explanatory power over stock returns of the Chinese Stock Market. The Ordinary Least Squares Method was used for the analysis. Data was collected for the daily Shanghai composite indices, oil prices, exchange rates between the Dollar and the Yuan, Chinese inter-bank offered rates and the political events from the beginning of 2006 to the end of 2007, which includes 515 observations. Evidence is found to support that the Shanghai composite index does not follow the random walk; therefore it is possible to predict future index movements using the historical data. The analysis also shows that oil prices are not positively related to the Chinese stock market and that the exchange rates between Dollar and Yuan are negatively related to the Chinese stock market. Finally, evidence is found that the interest rate changes and political events are not related with the Chinese stock market.