The Efficiency of the Chinese Stock Market with Respect to Monetary Policy

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Due to the bull stock market in China, the efficiency of the Chinese stock market has been one of the hot topics. Because monetary policy plays an important role in Chinese economy and there is a close relationship between stock returns and monetary policy, I test the efficient market hypothesis (EMH) for the Chinese stock market with respect to monetary policy. The vector autoregression (VAR) models are used to estimate the relations among stock returns and relative macroeconomic variables related to monetary policy. Due to the topic of the thesis, I focus on how stock returns are explained by macroeconomic variables to interpret the impacts of monetary policy on stock returns. The estimated VAR equation proves that there are significant impacts of lagged changes of interest rate, money supply and GDP on stock returns. Impulse Responses Functions (IRFs) and Variance Decompositions (VDCs) are then generated from the estimated VAR models to further assess the efficiency of the Chinese stock market. With significant bands c...