On the causal links between the stock market and the economy of Hong Kong
On the causal links between the stock market and the economy of Hong Kong

Summary/Abstract: A bulk of literature has identified the major economic drivers of Hong Kong’s rapid and steady economic performance over the last three decades. Of the major economic drivers identified, the performance of the stock market has received less attention. This paper examines the causal links between the stock market performance and economic performance of Hong Kong in an augmented VAR setting. Using an extended quarterly dataset that covers the period of 1986Q2–2014Q4 and the Toda-Yamamoto causality test, we find that stock market performance as proxied by the market capitalization ratio and economic performance stimulate each other. In addition, stock market performance as proxied by the 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 the turnover ratio. This finding suggests that the causal links between stock market performance and economic performance are highly dependent on the proxy used for stock market performance in the case of Hong Kong.

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