Research On The Relationship Between Foreign Exchange Rate And The Stock Price After The Foreign Exchange Reform In China

As the global economic integration and financial deepening enhancement of all countries, the connection between financial markets of different countries has been increased, meanwhile the connection among various sub-markets(such as stock market, foreign exchange market, money market) has also been increased closely. The change of a market price isn't only decided by the factors of itself,but also influenced by the factors of other markets. With the collapse of Bretton Woods System, the relationship between the two key prices-stock price and exchange rate has gradually emerged. With the appreciate of RMB, the prosperity of stock market had been continued for a long time, after the RMB yuan reform in 2005,so more and more scholars concerned on the relation of RMB exchange rate and stock price in China.Based on the previous research results, this article analyses the application of the two classical theories(flow-oriented model and stock-oriented model) in the specific economic environment of China, and analyses the channels of how the two variables influence each other(the channels are interest rate, money supply, trade balance, capital flow).And then use unit root test, cointegration test and granger causality test to verify the correlation of exchange rate and stock price under the guidance of theory. Test on the RMB nominal exchange rate against the dollar and the Shanghai and Shenzhen 300 Index from 2005.7.21 to 2010.12.31,the data frequency is about day, the empirical result show that:first, there is a long-term cointegration relationship between RMB exchange rate and China's stock price, but the correlation is weak and asymmetrical; second, the main transmission channels are money supply and capital flow, trade balance has limited impact, interest rate hardly play a role in China; third, the interaction between the two variables are negative, stock price rise as RMB appreciation, and then stock price rise promote RMB appreciation; fourth, the stock-oriented model explain the relationship of the two variables better, compared with flow-oriented model. The empirical result is consistent with the situation in China, it also suggest that the financial market efficiency is the main factor which determine the relationship of the two variables.To facilitate the financial market development healthy and stable, this article consider the policy recommendation should be put forward from three aspects-foreign exchange market, stock market and intermediary variables, to promote the financial market efficiency.