Does the linkage between stock market performance and economic growth vary across Greater China?

Abstract

Despite the phenomenal development in stock markets in China, there is little research on the linkage between stock prices and economic growth in Greater China: mainland China, Hong Kong and Taiwan. This article represents a step towards systematically investigating the relationship between stock market performance and economic growth in Greater China by conducting causality tests within the VECM framework. We find one-way causality running from growth to stock prices in the long run and also running from stock prices to economic growth in the short run. These findings suggest that economic fundamentals are the main determinants of movements in stock prices in the long run and stock markets act as a leading economic indictor of future economic growth in Greater China in the short run.