Monetary Policy Impact On China's Stock Market

With the rapid development of China's stock market, the stock market has become an important channel for financing. More and more people are involved in the stock market and the relation between the stock prices and real economic activity become closer. As an important macro-economic control department, the central People's Bank frequently uses the monetary policy to adjust the benchmark deposit and lending interest rates and deposit reserve ratio, and to adjust interest rate and money supply. Although each monetary policy is not adjusted for the stock market, it will have great impact on the development of the emerging China's stock markets. Based on the above, studying the relationship between the monetary policy and the stock market has practical meanings.Firstly, this paper theoretically analyzes the monetary policy impact on the stock market, the paper discusses the two tools variables of the monetary:the interest rate and money supply impact on the stock market. On the one hand, research interest rate impact on the stock market:In the beginning, the paper discusses the theoretical model of the interest rate and stock market prices; Besides the paper discusses how interest rates affect the stock market. Considering interest rate, the affection of interest rate on the stock market is mainly through two different ways:by the investors and the company to influence the stock price; the interest rate and the stock price are usually inversely related. On the other hand, research money supply impact on the stock market: The paper discusses the theoretical model of money supply and stock market prices; Then the paper discusses the three general monetary policy tools, mainly to study the deposit reserve ratio impact on China's stock market. And we draw a conclusion that the money supply and the stock price are up or down at the same direction.Secondly, the paper analyzes the monetary policy impact on the stock market, using empirical methods. In the empirical analysis using event study methods to study the adjustment of bank deposit and lending rates and statutory reserve ratio's announcement impact on China's stock markets, the analysis includes after the announcement the first trading day the stock market response, and after the announcement 15 days before and after, a total of 31 days, cumulative abnormal stock market index change of the returns selected for this paper in 2007 and 2008, the most frequently adjusted during the events of two years, come to bank deposit and lending rates and statutory reserve rate adjustment after the announcement of the stock market reaction to different, even with the stock market index are cumulative abnormal returns are often a positive correlation between relationship with our theoretical analysis contrary to the results obtained; ARCH model of this paper were also studied monetary policy interest rate (LIBOR seven days) and money supply (M2) on China's stock market (Shanghai Composite szzs) the impact of changes in interest rates by lending the stock market in China performance is the existence of negative correlation between the money supply M2 and China stock market a positive correlation exists between, and their relationship is still very significant, while interbank interest rates, or whether the money supply M2 is the stock market difficult to eliminate the impact of the short term, with the characteristics of persistent.Finally, we draw a conclusion that our government should strive to improve the effectiveness of the stock market, strengthen the stock market and currency markets; Besides the government should pay more attention to the asymmetric stock market leverage; strengthen the control of interbank interest rate and money supply M2; and further standardize and improve our stock market.