Research On The Effect Of China's Monetary Policy On Stock Market

Based on financial economics theory, this paper explores the impact of the Central Bank's monetary policy adjustment on China's stock markets by using time frame windows—event study method with high frequency data. We first study the impact of the interest rate policy and money supply on stock price movements and then explore the policy adjustment effect by using specially designed event windows. We also use the empirical results to test the monetary policy efficiency. The study can be divided into the following two parts:In Part I we study the short-term instant response of stock market prices to monetary policy adjustment in terms of the changes in Reserve Requirement Ratios. Using specially designed time frame windows with tick data, we find that the monetary policy adjustments significantly affect the stock returns and volatilities from all portfolios and sectors on policy announcement day the next day immediately after the announcements. However, the patterns of stock price responses to policy adjustments are irregular, and the response from different stock portfolios varies.In Part II we study the long-term relationship between monetary variables and stock market responses. Our results show that a long-term co-integration relation does exist between returns from Shanghai stock index and interest rate. The empirical results also indicate that, for 1% increase in Shanghai inter-bank overnight rate (SHIBOR), the Shanghai stock index declines 0.2%. The Granger causality test results indicate that the interest rate adjustment is the Granger reason of stock price movements. And there is no long-term CI relationship between money supply and stock returns while a short-term CI relationship between the two variables exists.In the last part of this thesis, we give some policy implications and suggestions based on the empirical analysis in the previous parts. I suggest that the Chinese monetary policy implementation system might be significantly improved by applying a more regular, more transparency and more consistent policy implementation procedure which can be based on an interest rate adjustment regime.