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Stock prices and demand for money in China: New evidence

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  • Baharumshah, Ahmad Zubaidi
  • Mohd, Siti Hamizah
  • Yol, Marial Awou

Abstract

This paper investigates the relationship between stock prices and the real money demands for China within a cointegrated framework. This study reports two important results. First, test results reveal that a stable long-term relationship exists between broad money (M2) and its determinants including real income, foreign interest rate, and stock prices. Second, stock prices have a significant substitute (positive) effect on long-run broad-money (M2) demand and its omission can lead to serious misspecification in the money demand function in both the short- and long-run. Finally, we demonstrate that long-run income elasticity is not significantly different from unity with the inclusion of stock prices in the money demand equation.

Suggested Citation

  • Baharumshah, Ahmad Zubaidi & Mohd, Siti Hamizah & Yol, Marial Awou, 2009. "Stock prices and demand for money in China: New evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(1), pages 171-187, February.
    • Handle: RePEc:eee:intfin:v:19:y:2009:i:1:p:171-187
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    3. Chien-Chiang Lee & An-Hsing Chang, 2013. "Revisiting the demand for money function: evidence from the random coefficients approach," Quantitative Finance, Taylor & Francis Journals, vol. 13(9), pages 1491-1502, September.
    4. Helmi Hamdi & Ali Said & Rashid Sbia, 2015. "Empirical Evidence on the Long-Run Money Demand Function in the Gulf Cooperation Council Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 5(2), pages 603-612.
    5. Hussain Ali Bekhet & Raed Walid Al-Smadi, 2016. "The dynamic causality between FDI inflow and its determinants in Jordan," International Journal of Economics and Business Research, Inderscience Enterprises Ltd, vol. 11(1), pages 26-47.
    6. Zahra Rouhani & Mehdi Behname & Sayed Mahdi Mostafavi, 2013. "A Comparative Study For Opportunity Cost Of Holding Money Between Selected Developing And Developed Countries," Romanian Economic Business Review, Romanian-American University, vol. 8(4), pages 7-17, december.
    7. Bekhet, Hussain Ali & Al-Smadi, Raed Walid, 2015. "Determinants of Jordanian foreign direct investment inflows: Bounds testing approach," Economic Modelling, Elsevier, vol. 46(C), pages 27-35.
    8. Chen-Huan Shieh & Shou-Hsiang Liu & Chung-Ching Lee, 2017. "How Stable is the Money Demand in Taiwan?," International Journal of Economics and Financial Research, Academic Research Publishing Group, vol. 3(5), pages 54-64, 05-2017.
    9. Zuo, Haomiao & Park, Sung Y., 2011. "Money demand in China and time-varying cointegration," China Economic Review, Elsevier, vol. 22(3), pages 330-343, September.
    10. repec:zbw:bofitp:2010_013 is not listed on IDEAS
    11. Noraida, A. W. & Abdul-Rahim, A. S., 2014. "Supply of Rubber Wood Log in Malaysia," Asian Journal of Agriculture and Rural Development, Asian Economic and Social Society (AESS), vol. 4(06), pages 1-11, June.
    12. Hung, Ying-Shu & Lee, Chingnun & Chen, Pei-Fen, 2022. "China’s monetary policy and global stock markets: A new cointegration approach with smoothing structural changes," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 643-666.
    13. Mehrotra, Aaron & Ponomarenko, Alexey, 2010. "Wealth effects and Russian money demand," BOFIT Discussion Papers 13/2010, Bank of Finland, Institute for Economies in Transition.
    14. repec:wyi:journl:002133 is not listed on IDEAS
    15. Drama, Bedi Guy Herve & Yao, Shen, 2010. "The Demand for Money in Cote d’Ivoire: Evidence from the Cointegration Test," MPRA Paper 20131, University Library of Munich, Germany.

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    Keywords

    Real M2 money demand Cointegration test;

    JEL classification:

    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics

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