The Impact Of Monetary Policy On Stock Prices And Returns Of China

The stock market has developed rapidly all over the world during the past four decades.On one hand, the development of the stock market promote the transformation of the traditonal financial system, boost the economic development, optimize the allocation of resources, provide new opportunities for the investors.On the other hand, the large volatility of the stock market has a negative impact on real economic development and bring a serious challenge to the formation of the Central Bank’s monetary policy. So the relationship between monetary policy and the stock market has become one of the cutting-edge issues in financial economics’ study.Since the earlier1990’s, China has established it’s stock market, and after several years of development it has made remarkable achievements in many areas, thus become one of the most influential stock markets in the Asia-Pacific region. Compared with the rapid development of the stock market, the investors experienced an explosive growth. The impact of monetary policy on the stock market has very important practical significance for so many investors. Accoding to financial theories, monetary policy is a very important factors in affecting the stock prices. But these theories are built on a series of assumptions, for a less developed coutry, the actual situation may not be consistent with the theory. So for the investors, the answers to these questions decided whether the investors can buy and sell stocks according to the changes of monetary policy of the central bank and obtain excess returns in the stock market. At the same time, since the end of the20th century whether central bank should bring the stock price changes into monetary policy objectives and whether monetary policy should sespond to the stock price volatility became a hot issue in domestic and foreign. The author thinks that the precondition of the two problems is whether the impact of monetary policy on the stock market is significant. So for People’s Bank of China, when we study this issue it is helpful to test whether monetary policy can transimit through the stock market. It is also helpful to answer the question whether the central bank should pay attention to the changes of the stock prices during the formation of monetary policy and whether the precondition of monetary policy respond to the stock prices are exist. On the basis of a lot of studies from home and abroad, this paper studied the following problems with some econometric methods. First, using the event study method, dummy variable regression modle and vector autoregression modle, this paper studied the impact of the deposit reserve ratio, the rediscount rate and open market operation on stock prices. Second, using the vector autoregression modle, this paper studied the impact of money supply on the stock prices. Finally, according to related economic theories and China’s practice, using structural vector autoregression modle with short restrictions, this paper had a research on the impact of monetary policy on the stock prices under an open economy. The results all show that the impact of the monetary policy on the stock prices is insignificant whether in the closed economy or in the open economy. This indicates that the investors can not optimize their assets allocation according to monety policy considering China’s less developed stock market. For People’s Bank of China, this result means that it is unable to intervene in the stock market, China’s monetary policy transmission mechanism of stock market is not smooth. So it is not appropriate for People’s Bank of China to bring the stock market volatility into monetary policy objectives at present and it is not necessary to react to the stock market volatility.The main innovations of this paper concluded the following points. In the first place, because there are many shortcomings of the required deposit reserve ratio, so it was rarely used in the west countries. This dicided that the foreign scholars unable to research the impact of the the required deposit reserve ratio on the stock prices, the local scholars also didn’t give an important research on this problem. Using the Event study, this paper conducts an emperical study on the announcement effect of the Required Reserve Rate of China on the13industries stock returns which based on the market capitalization-weighted. In the second place, this paper firstly studied the impact of open market operations on the stock prices of China. Finally, this paper firstly studied the impact of monetary policy on the stock prices of China in an open economy.Although this paper have made some progress on this problem, there are still some shortage about this problem. Firstly, owing to the hardness of the measurment of the open market operation of China, this paper use the central bank’s bonds measure the open market operation of China, whether this is correct or not, it needs further exam. Secondly, according to financial theories, the impact of monetary policy on different stock should not be the same, this paper didn’t have a study on this owing to several reasons. This should be strengthened in the future and it will be even more significant for the investors. Thirdly, although the required reserve rate of China is frequently changed since2006, these samples are not big enough from the statistical point, the conclusion of the impact of the required reserve rate on the stock prices may change with the expand of sample and this still need to be emperical tested.