Relationship between macroeconomic variables and net asset values (NAV) of equity funds: Cointegration evidence and vector error correction model of the Hong Kong Mandatory Provident Funds (MPFs)

This paper is the first to examine the cointegration and causality among the net asset values (NAV) of Hong Kong equity funds under the Hong Kong Mandatory Provident Fund (MPF) scheme, the local stock market index - Hang Seng Index (HSI), and selected Hong Kong macroeconomic variables including the inflation rate proxied by CPI, money supply (M2), and short-term interest rate proxied by overnight Hong Kong Interbank Offer Rate (HIBOR), during the period 2001-2009. Bivariate cointegration analysis indicates that the fund NAV respond to HSI and CPI, but not respond to M2 and HIBOR; while multivariate cointegration analysis adds further evidence that the fund NAV are cointegrated with a set of these macroeconomic variables. The fund NAV is found to be Granger caused by HSI, CPI, and M2; however, HIBOR does not have any Granger causal relations with the fund NAV. A multivariate error correction model (ECM) of each fund's NAV on all macroeconomic variables is finally constructed, which adds further evidence that fund price is not causal related with HIBOR. This suggests that any movements in selected macroeconomic variables can be used to predict the movement of NAV and the MPF scheme participants may ignore the effects of changes in interest rates on the changes in NAV when they consider reallocating the distribution between equity funds and other types of funds.