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On the Causal Links between the Stock Market and the Economy of Hong Kong

24 March 2016
Publication Type: Working Paper
JEL Code: C32, E44, G1

There is a bulk of literature that identifies the major economic drivers of Hong Kong’s rapid and steady economic performance over the last three decades. Of these major economic drivers identified, the performance of the stock market has received less attention. This paper examines the causal links between stock market performance and economic performance of Hong Kong in an augmented VAR setting. Using an extended quarterly dataset which covers the period 1986 Q2-2014 Q4 and the Toda-Yamamoto causality test, we find that stock market performance, as proxied by market capitalisation ratio, and economic performance stimulates each other. Also, the stock market performance, as proxied by total value traded ratio, and economic performance influence each other. However, the causal links between stock market performance and economic performance dissipate, if stock market performance is proxied by turnover ratio. This suggests that the causal links between stock market performance and economic performance are highly dependent on the proxy of stock market performance in the case of Hong Kong.

Series title: Working paper 591
1 March 2016
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