Research On Monetary Policy And Stock Price Volatility In China

Since 1980 s, with the rapid development of capital market, relative to the real economy, the influence of virtual economy rapidly increased, especially the stock price volatility has a huge negative impact on macroeconomic stability. The financial crisis in Japan in 1990, Southeast Asian financial crisis in 1997 and the subprime crisis in the USA in 2007 are vivid examples. Under this background, the research on monetary policy and stock price volatility became the forefront problem of monetary economics and finance economics. China’s stock market is the emerging market in the process of economic system transition, this characteristic determines that China’s stock market, like other emerging markets, has more frequent volatility than mature markets. At the same time, the development of China’s stock market has a lot of Chinese characteristics, and foreign research achievements only play a limited reference role. Therefore, starting from China’s specific conditions, the research on monetary policy and stock market volatility is of great significance to stabilize the financial system and promote the economic development in China.According to the basis of the existing research, this paper uses the mainstream research methods of monetary economics and finance economics, combining with the characteristics of China’s economic transition, and studies monetary policy and stock price volatility systematically, which not only enriches and expands theory and empirical research, but also promotes the integration of monetary economics and financial economics research in this field. The starting point of this paper’s research idea is whether China’s monetary policy can influence the volatility of stock price, and the foothold is whether monetary policy should and how to respond to stock price volatility. The main contents are as follows:Firstly, this paper theoretically analyzes the impact of monetary policy on stock prices: this paper summarizes the relevant theoretical basis that the monetary policy affects stock price systematically, and expounds the effect mechanism of conduction process from monetary policy to stock market; Based on the macro view, this paper builds the conceptual model and "stock price-currency-commodity price-output" system model that the monetary policy affect stock price through "interest rate channel", "liquidity channel", "inflation channels" and "output channels"; Based on the microscopic perspective, this paper describes the pricing process of "information → investor → expectation → cash flow → price" in the stock market, and set up the concept model and mathematical model of the process of stock price volatility and formation.Secondly, based on the macro theoretical framework that monetary policy affects stock price volatility, this paper establishes SVAR model which is exerted short-term constraints, including 6 endogenous variables: M1, M2, Interest Rate, CPI, Output Gap, and Stock Price. Through the important analysis method of impulse response function and variance decomposition, this paper investigates the long-term dependence relationship of monetary policy and stock price. The results show that there is a causal relationship between China’s monetary policy adjustment and stock price volatility. On one hand, China’s stock market already has certain effectiveness, and can respond to monetary policy adjustment; on the other hand, in the long term, the central bank can adjust monetary policy to achieve the purpose of intervening the stock market.Thirdly, on the base of microscopic theoretical framework that monetary policy affects stock price volatility, making monetary policy as exogenous variables, this paper uses event study, determines expectation return in the event window by generalized regression neural network model, calculates the cumulative abnormal return and average cumulative abnormal return of the stock price, and carries on empirical analysis on the short-term effect relationship between stock prices and announcement of the legal deposit reserve rate and the one-year benchmark deposit rate. The cumulative abnormal return test results showed that the influence direction of announcement of these two kinds of monetary policy tools to the stock price is uncertain, and often inconsistent with general economic theory analysis. the average cumulative abnormal return test results show that the upward adjustment announcement of them has a significant impact on stock prices in the overall or average level, while the impact of the downward adjustment announcement on the stock price in the overall or average level is not significant.Finally, this paper studies that whether monetary policy should and how to respond when facing stock price volatility: this paper analyzes the theory of the impact of asset price volatility on real output, inflation and financial stability, and give the understanding about debating whether monetary policy should response to the stock price volatility, and point out that the central bank should respond to the stock price volatility which influences the achievement of monetary policy goals and needs to make the appropriate decisions according to different situations; this paper carries on the empirical analysis of the influence of the stock price volatility to the real economy by SVAR model and indicates that China’s stock price contains information about future inflation in a certain extent, at the same time, the impact of stock price on the output gap is not stable. Also, this paper measure China’s financial condition index(FCI) by generalized impulse response function and test its forecasting effect to inflation, the results shows that China’s FCI including interest rate, exchange rate, stock price and money supply is a leading indicator of inflation; this paper estimates China’s monetary policy reaction function through the CGG model, and finds that comparing with the benchmark equation, the extended equation including stock return increases the instability of the monetary policy reaction function. Based on the above analysis, this paper believes that China’s central bank is not appropriate to making the stock price as one of the direct target of monetary policy, the choice of monetary policy to deal with the stock price volatility is to keep close "attention", make prospective judgment at the right time, and take positive action in advance to the stock price volatility which influences the achievement of monetary policy’s goals.