The Asymmetric Effects of Official Interest Rate Changes on China’s Stock Market During Different Market Regimes

Policy Impact on the Chinese Stock Market: From the 1994 Bailout Policies to the 2015 Shanghai-Hong Kong Stock Connect

“…Because the market volatility is already high and the intensity of the policies must be strong, it is reasonable that the double impact causes the market to fluctuate. Our findings show that different types of policies have different impacts on the stock market, which is consistent with the findings of Ma et al [9], Xu and Li [25], and Lv et al [34], especially for macro-control and bailout policies. For examples, Lv et al [34] demonstrated that China's official interest rate changes have great impact on the stock market.…”

“…Our findings show that different types of policies have different impacts on the stock market, which is consistent with the findings of Ma et al [9], Xu and Li [25], and Lv et al [34], especially for macro-control and bailout policies. For examples, Lv et al [34] demonstrated that China's official interest rate changes have great impact on the stock market. Ma et al [9] argued that bailout policies cause the stock market fluctuations because they are usually highly utilitarian.…”

“…Among them, stock market policies, including reform, stabilization, and bailout policies, are the main factors that affect the stock market. In addition, because security analysts predict the stock market, usually on the basis of important macroeconomic conditions [34], we also take macro-control policies into consideration but still pay more attention to the stock market policies.…”

Asymmetric Reactions of China’s Stock Market to Short-Term Interest Rates

“…Following Lv (2012) and Lv et al (2015), we divide China's stock market into three regimes on the basis of its stock returns. The Markov Regime Switching model without conditional heteroskedastic variance may be specified as follows:…”

“…The first innovation explains a new type of asymmetric effects of short-term interest rates on market return. Following Lv (2012) and Lv et al (2015), we adopt the Markov Regime Switching model to divide China's market into three regimes: Medium market (with a medium mean and the lowest variance), Bull market (with the highest mean and a medium variance) and Bear market (with the lowest mean and the highest variance). Then based on this unique market structure, we show that the short-term interest rates have a significant negative effect on stock market returns in Medium and Bull market, but no regular effect in Bear market.…”