Study On Volatility And Dynamic Correlation Of Chinese Exchange Rate And Stock Market Based On GARCH Cluster Models

Since 2005,exchange rates reform and split-share structure reform have been implemented in China.By using GARCH cluster models and adopting the data from July 2005 to December 2010,this article attempts to observe the characteristics of returns and volatility in Chinese foreign exchange market and stock market .The research has useful information for the portfolio management,market regulation and risk controls.The main distinctive research work and conclusions are as follows:Firstly,when it comes to the day-of-week effect of returns sequence,RMB-USD exchange rate exits Tuesday and Thursday negative effects,while RMB-EUR exchange rate only exists Thursday effect during2005～2010,its economical meaning is that there are significant revaluation features in RMB-USD ,which is on Tuesday and Thursday , and the RMB-EUR is easier to devalue on Thursday.Shanghai compose index also appears negative effects on Tuesday and Thursday.Meanwhile, RMB-EUR exchange rate and the Shanghai index all exist negative effects on Tuesday as mentioned on the volatility ,which means the decline of volatility.Secondly,In foreign exchange markets,there is significant negative relationship between the returns and fluctuation only in RMB-USD during the whole sample,stating that the more risk the more RMB-USD increase in value,which may be caused by the currency market investor's adaptive expection .Simultaneously,the Shanghai stock indix exhibits significant negative relationship between the returns and fluctuation,which means that Chinese investors will not get more returns as bearing high risk.Thirdly,the stock market and exchange market all have strong continued volatility which can well be captured by GARCH models.For example,once the Shanghai index is sufferred from a exogenous shock,the impact will still remain 88.7% after 30 trading days. Thus,it is difficult for stock market to eliminate abnormal fluctuations in the short term.Finally,after utilizing DCC-MVGARCH model and CCC-MVGARCH model,the article studies the relationships between foreign exchange market and stock market. The empirical results reveal that the relationship exhibits time-varying feature but more close to constantly negative correlation due to the role of economic indicator which exchange rate and stock index all possess. Theoretically, day-of-week effect is so called " abnormal phenomena" because it departures from efficient market hypothesis. The results reveals two markets are all not of effectiveness.Therefore,the reform task and working targets of foreign exchange and stock marekts would be perfect management system and optimized formation mechanism.Of course,much more work is needed.One challenge for future research will be planned to investigate other influence factors of day-of-week effect in foreign exchange market and stock market,such as fiscal and monetary policy.Meanwhile,we are going to study the nonlinear complex dynamic of exchange rates and stock indices.