The Relationship Between The Rmb Exchange Rate And Stock Price

Since July 21,2005,China began implementation of the exchange rate reform that RMB exchange rate no longer tacked the single US dollar and the managed floating exchange rate no longer tacked the single US dollar and the managed floating exchange rate system came into force. The exchange rate system is based on the market's supply and demand and adjusted according to a basket of currencies. After this reform, RMB exchange rate is in presence of hiking trend.especially 2007, the rate climbing up in dramatic way. And the RMB exchange rate reached 6.98 RMB/USD at April,2008, since it was 8.11RMB/USD at the day before the reform. However, since August,2008,there were inappreciable fluctuation in the RMB exchange rate.lasted until March,2010.The Shanghai and Shenzhen 300 Index also kept going up. However, after the subprime crisis, the stock market experienced the most terrible winter. Behind the complicated relation between the RMB exchange rate and stock prices, is there a real link? Is the financial crisis have certain impact on the relation between the RMB exchange rate and stock prices?The paper includes 5 parts arranged as follows: The first part is the introduction, it describes briefly the research background, significance, research methods, research content, framework and innovation of this paper, the definition of some concept.The second part is literature review and theory analysis. We look back the empirical research on the relationship between the RMB exchange rate and stock prices. The theory analysis begins from the basic theory,and makes a comprehensive analysis of the mutual influence and the channel of conduction between the exchange rate and stock prices; The third part is the theoretical model and statistics data which we make use of in the paper. The fourth part is an empirical study on the relationship between the RMB exchange rate and stock prices. This is the focus of this paper. We use daily data; Meanwhile we utilize unit root test, co-integration test,granger causality test, VAR model,impulse response function and a series of ARCH model etc. In the empirical study to examine the relationship between the RMB exchange rate and stock prices. And make a elaborate explanation for the empirical result. In the fifth part we put forward material policy advices to enhance the efficiency of exchange rate market and stock market, such as emending relelvant security statute, perfecting corporate governance, strengthening intendance, establishing some regulations to protect the rights and interests of investors, accelerating interest rate marketization, constructing multi-layer stock market system and so on.As for the above-mentioned empirical analysis, we get the following results: there is clear difference between before the crisis and after the crisis. Firstly, there is certainly positive correlation between the exchange rate and stock prices before the crisis.But after the crisis the relation becomes negative. Secondly, before the crisis, a one-way causal relationship exists from exchange rate to stock prices; and after the crisis, a causal relationship don't exist between the RMB against USD and stock prices. Thirdly, a long equilibrium relationship only exists between the RMB against USD and stock prices. Fourthly, only after the crisis, ARCH effect exists between the two; through the empirical analysis in this paper,we can conclude that there is certain relationship between the exchange rate and stock prices, and the subprime crisis surely influenced the relation. We should continue the reform of the two markets and conduction factors between them, in order to make the conduction channel more clear and unrestricted.The innovation of the paper,to begin with, depends on study of the relationship between the stock price and the exchange rate in the context of the financial crisis, and compare it with that is before the financial crisis, in order to know the effect which the crisis have on the relationship between the two. Besides, the paper choose the Shanghai and Shenzhen 300 Indexes Stock instead of Shanghai Composite Index which most of papers make use of;What is important, the paper adopts ARCH series model on the basis of predecessors'use of unit root test, co-integration test,granger causality test, VAR model,impulse response function.As a result of the limitation of the writer, the paper is poor in something. On the one hand, because of the lack of the ability to analyze, the paper would not explain how the crisis have influence on the relationship between the exchange rate and the stock price. On the other hand, it is so arbitrary that the paper treat April,2007 as the line of demarcation.