Wu, Hok FuHok FuWuDr. WOO Kai Yin2025-08-012025-08-012024In Tang, C. H., Woo, K. Y., Hon, T. Y., Au, W. K., Wong, W. K., & Wu, H. F. (Eds). (2024). Bubbles and behavioral finance (pp. 90-122). B P International.97881973195019788197319587http://hdl.handle.net/20.500.11861/24379In the literature, the relationship between stock price and economic variables was examinedin 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. ApplyingJohansen’s (1991)method, cointegration is found between each of the sub-indexes and different setsof 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 cointegratingvectors in different sub-index models. Granger causality resultsconclude that all four sub-indexes are long-run Granger-caused by the economic variables with differentspeeds of adjustment. Thepaperalso 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 responsesand variance decomposition analysis are performed to show the relative strength of the causal chain between thesub-indexes and economicvariables.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.enHang Seng Sub-IndexesCointegrationCausalityImpulseresponseVariance DecompositionBook Chapter10.9734/bpi/mono/978-81-973195-8-7/CH5