Research of the Relationship Between S&P 500 Index and SSE Index Under Vector Autoregressive Model

Abstract

With the escalating conflicts between China and the United States, there is an increasing need to research the relationship between the Chinese and U.S. capital markets. In this study, the return of the SSE index is used to represent the Chinese capital market, while the return of the S&P 500 index represents the U.S. capital market. A vector autoregressive model with an optimal lag is constructed, followed by a Granger causality test. The results indicate that the return of the S&P 500 index Granger causes the return of the SSE index. Furthermore, an impulse response function analysis reveals that there might be a mutual effect between the SSE and S&P 500 indices over a five-month period. Additionally, variance decomposition analysis provides insights into the contribution of other variables. Overall, this research sheds light on the interdependencies and dynamics between the Chinese and U.S. capital markets amidst the ongoing geopolitical tensions.