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An Empirical Study on the Relationship between Stock Index and the National Economy: The Case of China

Should the national economy lead the stock market or the other way round? Using co-integration test and Granger causality test, this paper analyzes the relationship between the stock index and the national economy in the case of China. The result of the empirical analysis indicates that there is no co-integration relationship between the stock index and the national economy in China. In addition, there is no Granger causal relationship between stock index yield and the national economy growth rate. With the empirical result, the thesis concludes with a discussion of the possible reasons of the seemingly abnormal relationship between the stock index and the national economy in China.