Research Variables and Data

In this section, this study will explain the definitions, time periods and sources of the variables. This research use monthly data collected from databases. The time periods lasted from January 2006 to March 2009 for China and from January 2010 to March 2013 for the United Kingdom. At the end, these variables are summarized into Table 3-1, Table 3-2 and Table 3-3.

3.2.1 Dependent Variables

The main purpose of this research is to discuss the relationship between the Olympics and the stock market of hosting countries. Thus, the research applies Shanghai Stock Exchange Composite Index (SSE) for China and Financial Times Stock Exchange 100 Index (FTSE) for the United Kingdom as dependent variables, to reflect on the stock market conditions. Both were collected from EconStats database and labeled as “close of month”.

3.2.2 Independent Variables

In addition to the dummy variable, the Olympics, there are many macroeconomic variables that may affect the stock market. The following are six quantitative variables including unemployment rate, consumer price index, industrial production, exchange rate, interest rate and money supply. And the Olympics is qualitative (or dummy) variable.

(1)Unemployment Rate

The definition of unemployment rate is that unemployed workers are divided by labor force. It is an important indicator to reflect business cycles. If the

unemployment rate is high, more workers are likely to be unemployed. Therefore, they may depend on their savings for living and invest less on the stock market. On the contrary, when the unemployment rate is low, workers with a stable income will invest more on the stock market. Hence, the unemployment rate has a negative effect on the stock market. (Birz et al., 2011; Bestelmeyer et al., 2010)

(2)Consumer Price Index

The consumer price index (CPI) is a key indicator to measure the inflation of one country. Most governments in the world are dedicated to maintain a stable CPI.

When inflation increases, all prices of goods and service will increase. It will affect the stock price and drive the stock market index rise.

In the meantime, inflation increase will make real interest rate decrease since real interest rate is equal to the value of nominal interest rate minus inflation rate.

Therefore, investors may transfer their assets from low risk position to high risk and high return position. It also drives the stock price and stock market up. For this reason, this study supposes that CPI is positively related to stock market. (Bekaert et al., 2010)

(3)Industrial Production

The industrial production is an indicator that reflects the change of industrial output level within one country. It also can be used to reflect the economic condition at a particular time. If the industrial production is high, we can infer that the demand is high and industrial sector needs to manufacture more goods.

Likewise, if the industrial production is low, we can infer that the demand shrinks

and the capacity utilization of industrial decreases. Thus, this research assumes that the industrial production has a positive effect on stock market. (Srinivasan, 2012) (4)Exchange Rate

Exchange rate refers to the rate which one currency will be exchanged into another. The study applies US Dollars (USD) as currency exchange into the amount of Chinese Yen and Pound Sterling.

The exchange rate will affect the amount of net export directly. For instance, if Chinese Yen depreciates, the exporters of China will gain some benefits and be stimulated to export more goods to other countries. When currency depreciates, the price of domestic products will decrease and these products become more competitive in the global market. Thus, net export increase will help domestic companies make more profits and increase the market price. Due to the above reasons, this study supposes that the exchange rate is positively related to stock market. (Beer et al., 2008)

(5)Interest Rate

There are two meanings of the interest rate. First, interest rate is the cost of direct investment. When the interest rate rises, the cost of direct investment will increase, which causes private sectors to level down their future investment. Thus, the private corporations may lose their abilities to create revenue in the future, which consequently affect stock price and stock market. Second, interest rate is the key factor of bond interest income for financial investment. If the interest rate rises, the yield to bond will increase. It is one important incentive to make investors

substitute holding bonds to purchasing stocks.

According the above discussion, this study supposes that the interest rate is negatively related to stock market (Alam et al., 2009). Moreover, the data of China were collected from People’s Bank of China and we use the one-month London Interbank Offered Rate as the interest rate of the United Kingdom.

(6)Money Supply

Money supply is decided by the central bank, it is a vital policy tool to control the economy in one country. If money supply increases, massive money will flow into capital market. The stock market will boom and the stock price rises. Therefore, we assume there is a positive relationship between money supply and the stock market. (Humpea et al., 2009; Chatziantoniou et al., 2013)

Moreover, there are different ways to calculate money supply. This study uses the definition of M2 and collected data from the central banks, People’s Bank of China and Bank of England.

(7)The Olympics

The Olympics is held every four years and regarded as the most important mega event in the world, whereas many countries strive to win the hosting.

According the literature review in Chapter two, the effect of mega events on the stock markets in host countries is still an enigma. Some empirical evidences showed that there is some positive effect on the stock market (Veraros et al., 2004; Nishio et al., 2009). Other evidences showed that the mega events have negative effect on the stock market. (Li, 2007; Liu, 2011; Samitas et al., 2012)

However, this study supposes that the Olympics have negative effects on the stock markets of hosting countries. That is, this study proposes that holding Olympics is disadvantageous in economy of hosting countries. On the other hand, it may draw positive effects on the mental state of the people in hosting countries.

(Kavetsos et al., 2008 Kaplanski et al., 2011)

In this study, the Olympics game is the only qualitative variable. The Beijing Olympics 2008 was held in August of 2008, and the London Olympics was held in July of 2012. This research takes anticipation effect and time lag effect into consideration, and sets up a more open interval of these dummy variables. The Beijing Olympics 2008 dummy variables consist of 1, time between May 2008 and November 2008, and all other time as 0. The London Olympics 2012 dummy variables consist of 1, time between May 2012 and November 2012, and all other time as 0.

3.2.3 Tables of Data

Table 3-1 Summaries of Expected Signs of Explanatory Variables on Dependent Variables

Explanatory Variables Expected Signs

Unemployment Rate −

Consumer Price Index +

Industrial Production +

Exchange Rate +

Interest Rate −

Money Supply +

The Olympics −

Source: This Study

Table 3-2 Summaries of Variables for China

Symbols Variables Units Time Periods Frequencies Sources

!!"

!"_! Interest Rate Percentage 2006/1~

2009/3

Table 3-3 Summaries of Variables for the United Kingdom

Symbols Variables Units Time Periods Frequencies Sources

!"#$

!"_! Interest Rate Percentage 2010/1~

2013/3