Economically-Linked Economies and Forecasting Chinese Stock Returns

Abstract

We explore whether economic links via trade affect aggregate Chinese stock market returns. We find that market return indices from countries that China net exports from can forecast the Chinese aggregate market return at the weekly time horizon. Countries that China net exports to have no consistently significant OOS predictability.

The economic intuition for our results follows from the fact that China has positioned itself as a low-cost provider competing on price. As a low-cost provider China has a more difficult time passing cost increases through to export customers because of sticky prices. However, production must meet demand implying that costs will drive short term economic gains for the overall Chinese economy. One interpretation of our results is that supply shocks are absorbed within 2 weeks.

Keywords: China, forecast, import, export, macroeconomics, forecast combinations

JEL Classification: C53, E37, F37, G15, G17