A study on the correlation between future economic conditions and stock returns under China's A-share market
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Date
2023
Authors
Wang, Zitong
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Publisher
University College Cork
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Abstract
Our study aims to investigate the explanatory power of future economic conditions on the returns of individual stocks in the Chinese A-share market. We use an integrated research methodology to study this topic scientifically and systematically. All A-share stocks in the Shanghai Stock Exchange and Shenzhen Stock Exchange are selected as the primary research objects, and data representing China's real economic activity are widely collected. With these data, we analyze a new trading strategy based on a reasonable prediction of future real activities using the capital asset pricing model and the Fama-French three-factor model. In addition, we have specifically examined the performance of this trading strategy on two different types of stocks (pro-cyclical and counter-cyclical stocks). Particularly noteworthy is that, unlike previous studies, we innovatively adopt the producer price index (PPI) as a measure of China's real economic activity based on the largest possible selection of sample intervals. This innovative approach provides a new perspective for us to deeply understand the operating mechanism of China's A-share market and the impact of economic conditions on the performance of individual stocks. The study results show no significant relationship between future economic conditions and individual stock returns in China's A-share market. Besides, those investors who want to get excess returns can short the pro-cyclical stocks and/or long the counter-cyclical stocks if production growth in the following month is anticipated to be above the steady state and vice versa. Our new trading strategy demonstrates potential advantages and gives investors a unique decision-making perspective. This finding not only provides investors with a more reliable basis for decision-making but also helps us to gain a deeper understanding of the operating rules of the Chinese stock market. This new perspective sheds light on the potential impact mechanism of economic activities on the Chinese stock market, which sheds important light on the optimization of investment strategies and risk management. Meanwhile, our trading strategy research provides an innovative way for investors to seek better returns among different classes of stocks. However, some things could be improved in this study. Future research can be further deepened and expanded to understand the relationship between China's A-share market and economic conditions more comprehensively and continuously optimize trading strategies' practicality and robustness. Overall, the findings of this thesis fill a research gap in the academic field and provide new perspectives and methods for investment decision-making and risk management. These findings will provide valuable references for relevant scholars and practitioners and contribute to a deeper understanding of China's macroeconomic conditions and their relationship with the A-share market.
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Keywords
Producer Price Index (PPI) , Pro-cyclical , Counter-cyclical , Chinese A-share markets
Citation
Wong, Z. 2023. A study on the correlation between future economic conditions and stock returns under China's A-share market. MRes Thesis, University College Cork.