Analysing the Impact of Economic Variables on Hang Seng Sub-Indexes Performance in Hong Kong

In the literature, the relationship between stock price and economic variables was examined in different countries. The findings confirmed the existence of fundamental variables in the Hong Kong stock market. This paper focuses on the case of Hong Kong and extends this issue to the Hang Seng sub-indexes, which include the Commerce and Industry Sub-index, the Finance Sub-index, the Properties Sub-index and the Utilities Sub-index, by applying the Vector Error Correction Model based on the sample from January 2004 to August 2014. Applying Johansen’s (1991) method, cointegration is found between each of the sub-indexes and different sets of economic variables, including price level, money supply, effective exchange rate, long-term interest rate, China stock market and industry-related variables. The results show that the long-run coefficients of some economic variables vary in size and sign in the cointegrating vectors in different sub-index models. Granger causality results conclude that all four sub-indexes are long-run Granger-caused by the economic variables with different speeds of adjustment. The paper also finds that industry-specific variables, relative to the macroeconomic fundamentals, are playing modest roles in determining the long-run equilibrium of the stock indexes. In addition, impulse responses and variance decomposition analysis are performed to show the relative strength of the causal chain between the sub-indexes and economic variables. This paper could draw implications for investors in their decision-making process about how the stock performance in various sectors is affected by different economic fundamentals.