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DETERMINANTS OF CHINESE STOCK MARKET RETURNS WANG FEI UNIVERSITI UTARA MALAYSIA 2012

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Page 1: DETERMINANTS OF CHINESE STOCK MARKET RETURNSetd.uum.edu.my/3181/4/WANG_FEI.pdf · DETERMINANTS OF CHINESE STOCK MARKET RETURNS WANG FEI A research submitted to the Othman Yeop Abdullah

DETERMINANTS OF CHINESE STOCK

MARKET RETURNS

WANG FEI

UNIVERSITI UTARA MALAYSIA

2012

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DETERMINANTS OF CHINESE STOCK

MARKET RETURNS

WANG FEI

A research submitted to the Othman Yeop Abdullah Graduate School of Business in

Partial Fulfillment of the requirements for the degree of Master of Science (Finance),

Universiti Utara Malaysia

WANG FEI, January, 2012. All rights reserved

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PERMISSION TO USE

In line with representing this thesis as partial fulfillment of the requirements for the

award of postgraduate degree from Universiti Utara Malaysia, I agree that the

University Library make this thesis freely available for inspection. I further agree that

permission of copying this thesis in any manner, in whole or in part, for scholarly

purposes may be granted by my supervisor or, in his absence, by the Dean of College

of Business. It is understood that any form of copying, use or publication of this thesis

for financial gain is not allowed without my written permission. In case of any use,

due recognition should be addressed to

Dean

Othman Yeop Abdullah

Graduate School of Business

UUM COB

Universiti Utara Malaysia

06010 UUM Sintok

Kedah Darul Aman

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ABSTRACT

This paper focuses on the macroeconomic variables underlying relationship with

stock market returns for China stock market over the period 2000 to 2010. Chinese’s

economy has experienced large change and it has also grown rapidly over the years.

Chinese’s economy has experienced substantial growth and taken over Japan which

used to be the second largest in terms of economy. Based on the specialty of China,

this research focuses on Chinese stock market. Data were analyzed using SPSS, by

gathering six variables that include inflation, oil price, gross domestic product,

exchange rate change, net export and money supply. The study uses Arbitrage Pricing

Theory as the basis for analysis. Correlation and regression result analyses were used

to examine the relationship between macroeconomics variables and stock returns. The

results indicate that five variables to have significant relationship with the dependent

variable. Moreover, the results also indicate the level of influence that each

macroeconomic variable has on the dependent variable. The findings are discussed

and recommendations for future research are presented.

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ACKNOWLEDGEMENT

Praise to God, the most merciful and most gracious for bestowing me with patience,

strength and excellent health throughout the process of completing this research. This

project paper would not been done without the assistance and support from many

people. I would like to take this opportunity to extend my deepest gratitude to my

supervisor, Puspakaran Kesayan for his expert advice, guidance and support

throughout the entire research.

In addition, I would like to thank Universiti Utara Malaysia for giving me this great

opportunity to achieve my educational goals throughout my Master of Science

(Finance) programme in UUM main campus in Sintok, Kedah.

My deepest appreciation also goes to my beloved family for constant support,

patience and understanding throughout my life.

Finally, my heartfelt gratitude to Dr. Angappan Regupathi and also Dr. Abdul Halim

Mohamed. Their contributions and assistances are very much appreciated.

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TABLE OF CONTENT

PERMISSION TO USE i

ABSTRACT ii

ACKNOWLEDGEMENT iii

TABLE OF CONTENT iv

LIST OF TABLES vii

LIST OF FIGURES viii

LIST OF ABBREVIATION ix

CHAPTER 1: INTRODUTION 1

1.1 Introduction to Stock Market……………………………………………...1

1.2 Overview of Chinese’s Stock Market…………………….……………….3

1.3 Problem Statement………………………………………………………...6

1.4 Research Questions………………………………………………………..7

1.5 Research Objectives………………………………………….....................8

1.6 Significance of Study……………………………………….....................9

1.7 Organizations of Study…………………………………………………...10

1.8 Conclusions………………………………………………………………11

CHAPTER 2: LITERATURE REVIEW 12

2.1 Introduction………………………………………………………………12

2.2 Underlying Theory……………………………………………………….13

2.3 The Dependent Variable: Stock Return……………...………...................16

2.4 Independent Variables……………………………………………………19

2.4.1 Gross Domestic Product (GDP)…………………………………...19

2.4.2 Exchange Rate Change………………….…………………………20

2.4.3 Inflation…………………………..…………………………………..21

2.4.4 Money Supply (M2)………………………………………………….22

2.4.5 Oil Price………………………….……..…………………………….23

2.4.6 Net Export……………………….…..…………………………….24

2.5 Theoretical Framework…………………………………………………..25

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2.6 Hypotheses……………………………………………………………….27

2.7 Conclusion……………………………….………………………………29

CHAPTER 3: RESEARCH METHODOLOGY 30

3.1 Introduction………………………………...………………….…………30

3.2 Description of Data………………………………………………………31

3.3 Data Collection Method………………………………………………….31

3.4 Evidence of Factors Affecting Stock Market Returns………….………..32

3.4.1 Fama-French Three-factor model…………………………...………..32

3.4.2 The Regression Model………………………………………..………34

3.4.3 R-Square………………………………………………………..…….35

3.4.4 T-Statist ic .…………………………………………………. . . .36

3.4.5 F-Statistic.…………………………………………….……………....36

3.4.6 Autocorrelation Test .………………………………………. . .37

3.4.7 Multicollinearity Test……………………………………………...38

3.4.8 Heteroscedasticity Test…………………………………….…39

3.5 Conclusion……………………………………………………...………..40

CHAPTER 4: DISCUSSION AND FINDINGS 41

4.1 Introduction…………………………………………………….……….…41

4.2 Descriptive Statistics……………………………………………………..41

4.3 Test of Correlation …..…………………………………………………...44

4.4 Model Summary…………………..…………..………………………….46

4.5 Multiple Regressions Equation.………………………………………….46

4.5.1 Coefficients…………………………………………………………..49

4.6 Test of Overall Model (F-TEST)…………………….…………………..53

4.7 Conclusion……………………………………………………………….53

CHAPTER 5: CONCLUSION 54

5.1 Introduction……………………………………………………………...54

5.2 Conclusion……………………………………………………………….54

5.3 Limitations of Study…………………………………………................57

5.4 Recommendations for Future Research……………..………..................58

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REFERENCE 60

APPENDICES 67

Appendix 1……………………………….…………………………………...67

Appendix 2…………………………….…………………………….………..68

Appendix 3…………………………………………...…….…….….………..69

Appendix 4……..…………………………………………………..…………72

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LIST OF TABLES

Table 4.1: Descriptive Statistic………………………………………………………42

Table 4.2: Correlations ………………………………………………………………44

Table 4.3: Model Summary ……………………………….…………………………46

Table 4.4: Coefficients ………………………………………………………………49

Table 4.5: ANOVA…………………………………………………....…….……….53

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LIST OF FIGURES

Figure 1: Theoretical Framework of Study………………………………26

Figure 2: Plot With Random Data Showing Heteroscedasticity.…………40

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LIST OF ABBREVIATION

APT Arbitrage Pricing Theory

BTM Book to Market

CAP Capital Asset Project

ERC Exchange Rate Change

GDP Gross Domestic Product

HML High Minus Low

INF Inflation Rate

MPI Market Pressure Index

MS Money Supply

MSCI Morgan Stanley Capital International

NETEXP Net Export

OPr Oil Price

RET Stock Market Returns

RMB RenMinBi

SMB Small Minus Big

US$ United States Dollar

VIF Variance Inflation Factor

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CHAPTER 1

INTRODUCTION

1.1 Introduction to Stock Market

Stock market is a big and popular market all over the world as it indicates the

overall performance of all companies in an economy. The performance of local stock

markets reflects the average market performance of a country. It serves as an index to

investors or governments in making their investment decisions. Meanwhile, the public

would be able to reap good levels of returns from this market as long as they make the

right investment decisions. Investors of different financial capacity are able to invest

in this market as long as they are able to get a return that is higher than their cost of

capital. This is the reason why stock market is popular all over the world. Hence, this

is the reason why it is necessary to do a research in this area especially on the Chinese

Stock Market which is currently seen as an upcoming economy.

There are two categories of shares that are traded in Chinese stock markets, they are A

shares and B shares namely. A share is purchased by Chinese citizens only and B

shares are only available to foreigners. A and B shares are traded at two official

exchanges in China, namely Shanghai Stock Exchange and Shenzhen Stock Exchange.

A share, the main share in Chinese the stock market, is dominated in terms of market

capitalization and level of activities. The B shares are listed on both the exchanges

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The contents of

the thesis is for

internal user

only

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