The impact of water and technology on the stock market in China and Japan based on a new heuristic model

Introduction: Water, as an essential strategic resource, is diminishing; this has been framed as a financial risk. We aim to quantitively investigate the impact of water use and technology on the stock market and compare the differences in China and Japan, which represent emerging and mature markets, respectively.

Method: We constructed three models using the difference generalized method of moments. The first and second models focused on how water use could influence stock market volatility and returns; the third model added technology as an interaction to explore its impact on the above mechanism. We used an ARIMA-EGARCH model to predict the trend of marginal stock market return with an increase in industrial water use in the next 5 years.

Results and Discussion: The results show that 1) water use increases the stock market volatility in both countries, but Japan shows a greater increase than China; 2) water use has a negative impact on stock market returns in China and a positive impact in Japan; 3) technology plays a positive role in the second model, while the ARIMA-EGARCH results correspond to the first two conclusions, which verifies the reasonability of the models. We conclude that heterogeneity exists in the two different market types because of technology level.