The Empirical Research On The Relationships Among The Interest Rate, Stock Prices And Exchange Rates

Interest rates are domestic prices of money,and exchange rates are foreign prices of money,stock prices are important asset prices.The relationships among interest rates,stock prices and exchange rates reflect the linkages between monetary market and capital market.Monetary market and capital market are important transmission medium of monetary policy,there are close relationships between the two markets in one country with high transmission efficiency of monetary policy,the measurement of associated degree between monetary market and capital market can be done by researching on the relationships among interest rates,stock prices and exchange rates.Existing literatures place emphasis on study between two variables,while this article which put interest rates,stock prices and exchange rates together into one model,examines the simultaneous relationships among three variables employing structural VAR model,multi-variate VAR-GARCH model,ITH method,bootstrap method,etc.In addition,the paper expands Branson's three assets portfolio model into four assets model by considering shares into the model,and illustrates the dynamic effects of exogenous variables on the equilibrium of interest rates,stock prices and exchange rates by graphs.In brief,this research enriches and develops the present theories.China is an emerging economy system,it's financial markets have characteristics of the transition period.On one hand,the financial system is improving gradually,the capital market is more and more open,the pricing of financal products is being determinated gradually by the market more or less,but on the other hand,the financial system is still not perfect comparing with developed countries,that is,China's financial markets have their own features,they are quite different from what are described in classical theories and from the condition of developed countries.There are a great deal of realistic meanings to study linkages among interest rates,stock prices and exchange rates employing Chinese data and samples,because by measuring the degree of correlation and giving explanations and suggestions,it's helpful for the government supervising and regulating the capital market,improving the transmission efficiency of monetary policy,and it is also useful for investors making decisions,for the management adjusting and controlling the economy system.This dissertation reviews and summaries some related literatures and theories,analyzes China's financial markets and linkages existing among them,and gives a few initial propositions about mutual relationships of financial markets.Based on these,the article gives empirical analysis of the simultaneous relationships,the lead-lag relationships and the spillovers effects among interest rates,stock prices and exchange rates,the paper's finding is as follows:There are almost not the simultaneous relationships and the lead-lag relationships among three variables which are called first moment relationships(expectation items),but there are significant second moment relationships(variance items).So at the present it is not how to prevent financial "contagion" from one market to another,but how to strengthen linkages among markets that we should pay attention to,only in this way we can get high transmission efficiency of monetary policy and have low information leakage.The fundamental countermeasures are taking institutional and regulational designs,pricing interest rates,stock prices and exchange rates by the market really so that prices of financial products can reflect real supply and demand.The paper consists of seven chapters:Chapter I is the Introduction,this part introduces the research background and sense, reviews the literatures,introduces the basic framework and research method of the paper, and then makes the brief self-evaluation for the innovation and shortages of the research.Chapter His theoretical analysis on the relationships among interest rates,stock prices and exchange rates. This part theoretically analyzes and interpretes relationships among the interest rate, stock prices and exchange rates based on exchange rate determination theories, including the linkage between interest rates and stock prices,bewteen interest rates and exchange rates as well as bwteen stock prices and exchange rates. In this chapter's end, I expand Branson's (1977) three-asset model on the exchange rate determination by including shares into the model,that is,the new model is a four asset model,then I illustrate the financial market's equilibrium and dynamic changes,make aconclusions about theoretical expectations of the relationship among variables.The conclusions of this chapter are the starting point for empirical research.Chapter III is a general description about financial markets in China.The chapter analyzes the character of China's financial markets,theoretically examines the linkage among the interest rate,stock prices and exchange rates in China.Chapter IV is the interpretation about models and methods employed in empirical research. The chapter introduces some econometric methods applied to the dissertation, including ITH methods, SVAR model, VAR-GARCH model, bootstrap techniques, the Generalized Moment Estimation (GMM) and so on. ChapterⅤis an empirical study on the simultaneous relationships among interest rates,stock prices and exchange rates, I introduce a series of diagnostic testing methods and give tests of time series. Then I figure out a two-equation simultaneous model which is based on the improved SVAR model, the improved SVAR means allowing the existence of heteroscedasticity in the residuals.Thirdly,I estimate the model by the ITH method, bootstrap technology, GMM methods and so on,get values of coefficients ofβand a,which indate respectively the response coefficient of the interest rate to stock prices and stock prices to the interest rate. Using the same method,I give a research on the simultaneous relationship between the interest rate and exchange rates,between stock prices and exchange rates.ChapterⅥis about the lead-lag relationships and the spillovers effects among interest rates,stock prices and exchange rates.In the first place I examine the lead-lag relationships,price and volatility spillovers effects between the interest rate and stock prices,between the interest rate and exchange rates,between stock prices and exchange rates and among three variables respectively employing VAR-MGARCH model.Then I sums up and ends with some explations and suggestions. At the end of this chapte,I compare the difference of estimation results between two variables model and three variables model,and give an analysis and explanation on this sort of difference.ChapterⅦis conclusions and suggestions.I combine results of SVAR model and VAR-MGARCH model, and have a comparison between theoretical analysis and empirical research. Then I give some suggestions and directions for further study.