Research On The Correlation Between Exchange Rate And Stock Price

With the development of economic globalization and the improvement of financial deepening, the relationships among different financial markets become more and more closely, thus the market prices also become more vulnerable to other market volatility, in addition to influencing by their determining factors. Similarly, the relationship between price volatility of foreign exchange market and stock market also gradually emerged. Exchange rate and stock price, as two major financial-market prices, are not only indicators of national economic strength, but also references of microcosmic decision-making. So the research on the relationship between exchange rate and stock price has important significance.According to the logic clue of history - theory - empirical, this paper begins with historical case studies of co-movement between exchange rate and stock price during the Asian Financial Crisis and phenomenon of tremendous appreciation of the Japanese yen along with stock market bubble in 1980s, and it triggers further research on the relationship between exchange rate and stock price. Making use of the general equilibrium analysis, it derives a calculus formula from a new framework which is extended from the open economy Mundell-Fleming model by including stock market. It shows that there is a negative correlation between exchange rate and stock price. Next, it analyzes mutual transmission mechanisms of co-movement between exchange rate and stock price by employing the method of combining macroscopic and microcosmic perspectives, and is found that the transmission mechanisms are asymmetric. Exchange rate volatility is transmitted through the traditional approach, the money supply approach and the international capital flow approach to stock market, while stock price volatility spillover effect is transmitted through the portfolio approach and the money demand approach to foreign exchange market. In the case of the reform of the RMB exchange rate regime on July 21, 2005, it investigates empirically the short-and long-run dynamic relationships between the RMB exchange rate and stock price in a vector error correction (VEC) model by using time series analysis.Based on theoretical and empirical analysis, this paper draws the following conclusions: In an open economy, a negative two-way correlation, which need to be achieved through a number of intermediaries, exists between exchange rate (direct quotation) and stock price, and it is influenced or changed by the maturity and opening extent of financial markets. Finally, in light of this conclusion as well as the present situation of China, this paper proposes some policy suggestions for promoting the development and coordination of China's foreign exchange market and stock market and constructing a benign interaction between exchange rate and stock price.