The Impact Of Global Financial Crisis On Major Segments Of Chinese Stock Market

This dissertation focuses on the impact of global financial crisis on China stock market efficiency, stock price and exchange rate causation relationship and initial public offerings. Over the period of crisis due to contagion nature of crisis Chinese stock market also faced a setback and stock prices comes to the lowest level in last quarter of 2008. This downward trend of stock prices has its own implication upon the efficiency of stock market. Most of the markets around the globe of world especially markets in developing economies are considered inefficient, and the aim of every economy is to create efficiency in their financial markets, in order to attain maximum utilization of capital resources. In order to check the efficiency of Chinese stock market, I have divided my data into two groups i.e. one is before global financial crisis while second one is during global financial crisis and I have used Augmented Dicky Fuller (ADF), Unit Root test along with Dicky Fuller-GLS, Philip Perron Test (PP) and Kwiatkowski-Phillips-Schmidt-Shin tests (KPSS) for sake of robust testing. The results of the study shows that Chinese stock market is weak form efficient and past data of stock market movement may not be very useful in order to make excess returns and the global financial crisis has no significant impact on the efficiency of China stock market.Secondly, i try to investigate the long-term relationship between stock prices and exchange rates movements. The relationship between exchange rate and stock prices is very critical and important to understand because both variables played a vital role in capital inflow and outflow from the economy of a country and it becomes more crucial at the time of turmoil in world financial markets. My study focusing in tries to find the nature of this relationship in Chinese stock and foreign exchange market. I find that before crisis period here is a strong and positive cointegration relationship between both variables at level. The direction of causation runs from exchange rates to stock prices. The results are same in both Shenzhen and Shanghai stock exchange. So if both stock prices and exchange rates are cointegrated and causation runs from exchange rate to stock price then the policy of controlling exchange rate could save stock market from crisis, create an opportunity for developing and emerging markets to attract foreign investment, and helpful for exporting countries to enhance the price competitiveness of their export products in international markets. So the Chinese government adopted the policy of controlling exchange rate over the period of 2009 and fixed the exchange rate of Chinese RMB in order to prevent the stock market from heavy capital outflow and also to prevent their export market. This policy proves very fruitful for both Chinese stock, foreign exchange and export markets. The second part of this section, in which exchange rates was fixed over the period 2009, show different results. The results during the period of crisis show that there is no cointegration between stock prices and exchange rates at any level. Granger causality test during the period of crisis proves no direction of causation:neither stock prices effect exchange rates nor exchange rates effect stock prices. The results changed altogether because the policy of controlling exchange rates. The markets where both of these variables are cointegrated and exchange rate Granger cause stock prices investors could benefit by having eyes on exchange rate movement.Thirdly I try to endeavor Chinese stock market performance in context of IPOs during and before global financial crisis. I find that during crisis period not only the number of IPOs increased but also market adjusted first day return and the short run performance of market adjusted return is improved. Also the financing through IPOs increased during crisis period as compared to before crisis. Although the phenomena of crisis significantly affect the Chinese stock market where the indices falls to a lower level of 6000 in Shenzhen and 2000 in Shanghai stock exchange, but not affect drastically the market and performance of new issues.In the last part of my dissertation I have performed as comparative analysis of underpring and performance of IPOs during last Asian financial crisis and the prevailing global financial crisis. Results show that during global financial crisis the underpricing of IPOs is 10% more than the last Asian financial crisis in addition, there is immediate fall in the short run performance of IPOs during global financial crisis as it was very less in Asian financial crisis.Previous studies have worked over these issues but there is no evidence in context of global financial crisis. Global financial crisis has its own implication upon the efficiency of stock market and the nature of causation between stock prices and exchange rates. It is very important to identify the characteristics of these issues, because when certain event happen one cannot make effective policy or way out to protect the economy of country from swear loses until they know the exact relation and nature of these very important economic variables in the financial sector of a country.â– ...