RELATIONSHIP AMONG INTEREST RATE, MONEY SUPPLY, AND STOCK PRICE: EVIDENCE FROM CHINA AND THE U.S.

Abstract

The relationship between macroeconomic indicators and the stock market has always been a hot topic in the field of financial economics. This thesis analyzes the relationship between stock indices, interest rates, and money supply in China and the U.S. A long-term cointegration relationship is established for the two countries, based on various Johansen’s cointegration tests and vector-error correction modeling. This thesis also examines the banking sector’s response to the COVID-19 pandemic through a panel regression model with dummy variables for the pandemic period, January 2020 to December 2021. I found there was a significant positive impact of macroeconomic cointegration on Chinese banking stocks, whereas the U.S. banking stocks show a negative but insignificant correlation. The pandemic had a notably negative impact on the Chinese banking sector, but an insignificant impact on the U.S. banking sector.