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The Dynamic Impact of Macroeconomic Factors on the Stock Market

Author(s)

Derun Wang

Affiliation(s)

School of Statistics and Mathematics, Shandong University of Finance and Economics, Jinan, Shandong, China

Abstract

In financial markets, the stock market serves as a "barometer" of the economy, with its fluctuations influenced by a multitude of macroeconomic factors. Accurately capturing the dynamic impact of macroeconomic factors on the stock market is crucial for investor decision-making and regulatory policy formulation. In the current operation of financial markets, stock prices change rapidly, often exhibiting high-frequency characteristics in data and time series, whereas macroeconomic variables such as GDP, GDP growth rate, unemployment rate, and price levels typically manifest as low-frequency data. This disparity in data frequency can easily lead to estimation errors when studying the dynamic impact of macroeconomic factors on the stock market. This paper summarizes previous research findings on the impact of macroeconomic factors on the stock market and compares the accuracy of mixed-frequency data models with traditional GARCH-family models. It selects appropriate macroeconomic factors affecting the stock market, focusing on four primary factors—Producer Price Index (PPI), Consumer Price Index (CPI), Macroeconomic Climate Index—and secondary factors such as monetary policy and macroeconomic fundamentals like GDP growth rate. The study further explores the long-term impact of the overall macroeconomic environment on stock market volatility. The research indicates that mixed-frequency data models outperform traditional GARCH-family models in reflecting the impact of macroeconomic factors like PPI on stock market volatility. The realized volatility of the stock market significantly amplifies its long-term fluctuations. Both the level and volatility of PPI, CPI, and the Macroeconomic Climate Index exert a notable influence on the long-term volatility of the stock market, with the volatility dimension showing strong persistence. The interbank lending rate, however, only weakly affects the long-term component of stock market volatility in terms of its level.

Keywords

Macroeconomic Factors; Mixed-Frequency Data Model; Time Series; Long-Term Volatility

References

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