Research On The Impact Of Fluctuation Of RMB Exchange Rate On The Stock Market

Since Bretton Woods System disaggregated in 1970's, many countries begin to carry out flexible exchange rate regime. As exchange rate fluctuates more flexibly, the relationship between stock market and foreign exchange rate becomes more and more complex. Any change of policy reflected quickly on two markets. If one currency appreciates, the price of stocks and bond in the country will increase and price of foreign assets will decrease. The samples in Japanese, Taiwan and southeast country illuminate: the price of assets is not only impacted by the facters that impact on theirselves, but also by the exchange rate.In recent years, with rapidly development of economy in China, our foreign reserves and favorable balance of trade has increased year by year, so foreign regime of Fixed pegging dollar hasn't meet demand of economy, the pressure of RMB appreciation becomes bigger and bigger. On July 21, 2005, the People's Bank of China, announced: from July 21, China began to institute a regulated, managed floating exchange rate regime based on market supply and demand and in reference to a basket of currencies. That is, RMB exchange rate won't peg dollar, but institute a kind of more flexible regime, the fluctuant scale will be expended.RMB appreciation and its anticipation will effect on China economy in a lot of fields, especially stocks market with high liquidity. Therefore, the research on the impact of exchange rate on the stock market is very important, the results have great signification for investors, policy makers and researchers.This article attempts to examine whether the stock market and foreign exchange markets are related to each other or not in China. The research employs Granger's causality test and cointegration test on daily data (stock adjusted price and exchange rate). The article chooses the data of one and eight months after exchange rate reform. The major findings of the research are: (a) there exists a bidirectional causality between the exchange rate of euros to RMB and stock adjusted price; (b) Stock adjusted price is unidirectional causality to exchange rate of dollar and Japanese yuan to RMB. (c) the stock price and exchange rate aren't related to each other.On base of analysis above, the article analyzes the reason that there isn't cointegration relationship between exchange rate and stock price. Main reason includes: irrational stocks regime and exchange rate; interest rate can't be decided by market; irrational financial system and so on. Then the article analyzes the impact of exchange rate reform on stock price, for example: reevaluating listed company; impaction on different industry; impaction on international capital, A, B, H stocks market.This article is made up to four parts. The first part is introduction, which introduce the objective and frame of the article, and the former survey results.Then, the first chapter mainly introduces the theory related and the channels of exchange rate to stock price. Besides them, this part also introduces empirical methodology: Granger's causality and cointegration.The second chapter is main part. The part set a sample of Japanese to provide some experiences for China. Then test is made. After that, the article analyzes the reason of test results.The third chapter lists some proposals to rationally develop stock market and exchange rate and defend financial crisis. China should constitute new mechanism of foreign exchange; avoid that Chinese economy be cornered among crises; establish dynamic control and warning mechanism that international capital flows to stock market, make the interest rate decide by market.