Studies On The Effects Of China's Monetary Policy On Stock Returns

As it is known to all, monetary policy plays a very important role in the control of macro economy by the monetary authorities. China has achieved great success and accumulated a lot of experience on that in more than 30 years since the Opening-up Policy was executed. The implementation of monetary policy gives profound impacts on many economic markets including the stock market. As an essential part of the financial systems, the stock market plays an indispensable role on resource allocation, property rights exchange, risk management and corporation supervision. So it is of great significance to both of the monetary policy framers and the stock investors that we study the transmission mechanism of monetary policy and make out how monetary policy influences stock returns.Such studies have attracted many macroeconomists and financial experts to focus on this problem. There are plenty of researches made by foreigners while the domestic researches are slightly less especially those that are about the effects of our monetary policy on stock returns. This paper intends to do some relevant theoretical discuss and empirical analysis based on the monthly macroeconomic data from January 2000 to December 2010. We hope to get some significant and enlightening conclusions.Starting by describing basic monetary policy theories, this paper mainly discusses the effects on stock returns from money supply shocks and interest rate shocks. Money supply shocks may change the inflation situations so that cause the monetary portfolio effects and then influence stock returns. Friedman-Schwartz Money Supply Model gives a further explanation on money supply shocks to stock returns from the contradictory between money demand and supply. Furthermore, Money supply shocks may also influence stock returns by changing interest rate.Interest rate shocks have effects on stock returns mainly by influencing investment. Generally, people invest only when the capital marginal efficiency is beyond the interest rate. So if the capital marginal efficiency remains unchanged, then that the interest rate decreases will increase the investment. Changes in investment not only can change the assets'demand and supply situations and then have effects on stock returns indirectly but also can cause mergers between enterprises then have effects on stock returns directly. It was considered in Gordon Equation that interest rate may influence the intrinsic value of stock. It indicates that the increase of interest rate can probably decrease stock returns.Empirical researches in this paper include two parts: one is using VAR model to roughly study the effects of China's monetary policy on stock returns; the other is that we utilize Markov-switching model to analyze whether China's monetary policy has asymmetric effects on stock returns. Specific empirical research results are as follows:First of all, results obtained from VAR model indicate that China's monetary policy has some effects on stock returns and money supply shocks are more effective to stock returns than interest rate shocks. The impulse responses of stock returns show that money supply shocks have significant positive effects to stock returns while interest rate shocks just have some slightly negative effects. The interest rate has not play its role totally as an intermediate target of monetary policy.Secondly, the empirical studies via Markov-switching model show that China's monetary policy has a certain degree of asymmetric effects on stock returns and it mainly displays in that there are some differences for monetary policy shocks to stock returns between bull and bear markets. On one hand, money supply shocks have stronger effects in the bull market than in the bear market;on the other hand, decreasing interest rate in the bear market looks like more effective to help increase stock returns while in the bull market the interest rate seems less useful. So we consider that China's monetary policy has a certain degree of asymmetric effects on stock returns.Finally, we make a comparison of the estimated results from linear models and Markov-switching models and find that the latter ones are more meticulous and reliable than the former ones in describing the effects of monetary policy on stock returns.