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Research On The Relationship Between The Fluctuations Of RMB Exchange Rate And The Stock Price Changes

Posted on:2010-01-25Degree:MasterType:Thesis
Country:ChinaCandidate:Q ZhangFull Text:PDF
GTID:2189360272998857Subject:Finance
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Since 2008,the RMB exchange rate against the U.S.dollar continues to rise and has been changed from 1:8.11 to 1:6.81.Overall,the RMB revaluation has accumulated more than 15%.China's stock market has also gone through drastic changes like a roller coaster,since the end of 2006 the stick market enter the bull market,the Chinese stock market all the way up until 2007,the Shanghai A shares was up to around 6100,then,the stock marketstarted down.The adjustment of these two markets is in the adjustment of their isolation or interaction is intrinsically? We know that as two of the most important financial market,the foreign exchange market and the stock markets,do not exist in isolation,but have very close contact,so the linkage relationship between them is very important,it is worth our careful study.July 21,2005 China began to the implement of the exchange rate reform.The formation of the exchange rate will be more respect for market forces and the fluctuation of exchange rate will be flexible.In 2005 the reform of split share structure also allows for the development of China's stock market.Because of the reforms,the formation mechanism of the stock price tends to reasonable.The linkages of these two financial markets will increase.Therefore,at this stage,the research of our financial markets, particularly the exchange rate market and stock market,has important practical significance.The purpose of this paper is that through the analysis of the RMB exchange rate fluctuations and changes in China's stock market to find the linkage between the two relations.Through the analysis of the relationship between stock prices and RMB exchange,as well as drawing on international experience,I put forward some feasible and meaningful recommendations for policy-making.This article is divided into five sections,the specific structure and main contents are as follows. In the first part of this article,first of all I details the research background,and reason why chooses the starting point of this topic.And then I introduced the theoretical and practical significance,and finally the establishment of a research framework of this article.In the second part of the research,literatures at home and abroad were reviewed. This section reviews domestic and foreign scholars' literatures on the relationship between stock price changes and the exchange rate,and in accordance with the theoretical analysis and empirical research I classified the literatures.Especially I learned a lot about exchange market and stock market in countries with opening economies,I found the relevant theoretical and empirical model based on support.In thethirdsection I describe the theoretical basis for research on the relationship between exchange rate and stock price.Specifically I addressed classic theory of the relationship on foreign exchange rate and stock prices:the flow-oriented model and the portfolio balance model.These two models described linkage between the relations from the current account and capital account.Then I introduced conduction mechanisms exchange rate on the stock,including the trade regime,the interest rate mechanism,the money supply mechanism and the expectation mechanism.I also introduced the transmission mechanism stock on the exchange rate,including the trade regime,the monetary mechanism and portfolio mechanism.The final part of this section I explained the need for empirical studies Of the econometric models,such as cointegration and Granger caUSDlity test.In the fourth part of this article I empirically studies relationship between the exchange rate and stock price changes.I employ econometric methods empirically tested the RMB exchange rate variables and stock price changes variables and obtained correlation between the RMB exchange rate and the stock market.I selected the RMB against the U.S.dollar,the RMB against the euro,the RMB against the Japanese yen,the RMB against the Hong Kong dollar exchange rate as the representative of exchange rate,the Shanghai Composite index as the representative of the stock price.First of all,I employed unit root test to test the variables to verify stability of the variables.If Not smooth,then all variables needs difference,if the differential has been stable after the sequence,these sequences is a single whole;and thenl use Johansen cointegration test to verify whether the RMB exchange rate and stock price changes exists cointegration relations.If there is a cointegration relationship,these two variables have a long-term and stable relationship;Finally,I employ Granger caUSDlity test to test whether there is a caUSDI relationship between the RMB exchange rate and stock price changes.If there is a caUSDI relationship between them,I need figure out a single or two-way caUSDI relationship.In this paper, the selected data is July 25,2005 to December 31,2008 daily data.Empirical result shows that the RMB exchange rate against the U.S.dollar,the RMB exchange rate of HKD and Shanghai Composite Index exist a the long-term cointegration relationship.RMB exchange rate against the Japanese yen,the RMB exchange rate against the euro and the Shanghai Composite Index does not exist a cointegration relationship;RMB against the U.S.dollar,RMB against the Hong Kong dollar and the Shanghai Composite Index exist a two-way caUSDI relationship.And the RMB against the Japanese yen,the RMB against the euro and the Shanghai Composite Index does not exist a caUSDI relationship.Come to the conclusion that after 2005 the relationship between the RMB exchange rate and stock price changes, gradually established,although the relationship between them is not perfect,still greatly improved.The main reasons for this are:the exchange rate formation mechanism is unreasonable,not realized the true wishes of the foreign exchange settlement and sales system as a result of China's current capital account controls, can not fully respond to market demand and supply.RMB exchange rate is not market-oriented.This impacted thetransmission between the RMB exchange rate and stock prices;Unreasonable price formation mechanism,as a result of China's stock market is impacted to a large extent by the state's macroeconomic policies,the stock market downturn when the Government will introduce favorable policies,the stock market rise when the Government will be introduced in order to guard against the risk of bad news,this will lead to price distortions;Incomplete development of the financial markets,China's financial market is the main bank lending market,the discount market instruments,foreign exchange transactions,securities markets.However,generally speaking,China's financial market is still in its initial stage,the amount of funding to participate in the transaction do not,very few,such as the types of credit instruments, financial markets do not meet the sub-market price of the mutual influence between the conditions.In Part V I suggested relevant policy recommendations for China's foreign exchange market and stock market.Recommendations for the foreign exchange market are:the steady implementation of China's capital account convertibility,for current account adjustment under the mandatory foreign exchange settlement system and the system in order to prevent short-term speculative capital on the impact of our country,further develop our country's foreign exchange market.For stock market development are:improving the price formation mechanism,the establishment of a multi-level capital market system and strengthen supervision on the stock market, enhance market transparency and asymmetric information,the construction of international capital flows,such as early warning mechanisms.
Keywords/Search Tags:RMB exchange rate, Stock market prices, Unit root test, Cointergration, Granger caUSDIity test
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