Analysis Of Co-movement Of The Major Stock Markets In The World And Exchange Rate With Shanghai Stock Market

The rapid spread of the global information makes the economic operation, financial policy and monetary policy of a country give rise to some fluctuate to the international financial market in some ways. This Information transmission leads to some linkage effect which causes the expansion of American subprime mortgage crisis and the fall of International stock markets and China stock markets is also concussed repeatedly. The research of this linkage effect is significant to study the connection in China and world economy and financial risk can be prevented by investors.The research objects in this paper is the Closing date of Shanghai Composite index, S&P 500 index, Hong Kong hang seng index, Nikkei 225 index, Singapore Straits Times Index and the exchange rate of RMB against dollar, RMB against HKD. A number of approaches have been introduced to discuss the linkage effect between the major stock market in the world and Chinese stock market. The main conclusion of this paper is summarized as following:First, according to the results of co-integration test, there exists no long-term equilibrium relationship between Shanghai Composite index and S&P 500 index, Hong Kong hang seng index, Nikkei 225 index, Singapore Straits Times Index. The main reason is that the present Chinese stock market cannot mirror the economic situation distinctly. The stock index is influenced by the governmental economic policy in a large part, and the internal balance of financial markets is imperfect. There exists a large gap to the impeccable stock market in America and Japanese, which is highly marketized and sensitive to the alteration of economic situation. A long-term equilibrium relationship is derived among the exchange rate of RMB against dollar, RMB against HKD, and Shanghai Composite index. Both the exchange depreciation of RMB against HKD and the Appreciation of RMB against dollar can raise Shanghai Composite index. However, the adjust speed is slow if the relationship deviates from the long-term equilibrium.Second, a coincident conclusion is derived by using Granger causality analysis, impulse response analysis and variance decomposition, respectively. American stock market can go back to initial state rapidly when it is impacted by the other stock markets; Japanese stock market is almost not affected by the impact from other stock markets expect American stock market. The impact effect of American and Japanese stock markets is significant to the stock markets in Hong Kong and Singapore. The Shanghai Composite Index is mainly affected by the impact of the Hong Kong stock market, followed by the Japanese stock market and the U.S. stock market. There exists unidirectional causality between the exchange rate and Shanghai Composite index. The stock market impact on the exchange rate is less than the exchange rate impact on the stock market. The main reason is related to the economic status of countries, the value and maturity of the stock market, information transmission strategy and screening capacity, the robustness and specification of the supervision and management system, whereas the unidirectional causality between the stock market in the mainland of China and the exchange rate was mainly due to that the exchange rate fluctuations in China is under control.Third, the results of the volatility spillover effect test show that the market information mainly transmits from S&P 500 index and Nikkei 225 index to Shanghai composite index unidirectionally, the information of Shanghai composite index and Hong Kong hang seng index transmit reciprocally, there is no distinct information transmission between Shanghai composite index and Singapore Straits Times Index. The reason of these results is that Chinese stock market has a stronger connection with international stock market with the opening up of financial markets, which can absorb more information from earning volatility of mature stock market in American and Japanese. With the increasing number of mainland enterprises which have been listed in Hong Kong, it is more frequently and rapidly that information transmits between the stock markets in mainland and Hong Kong.Four, the results of dynamic correlation coefficient analysis show that Chinese stock market has a small relevance with American, Japanese and Singaporean stock markets, but more connection is revealed with Hong Kong stock market. It is because that more enterprises have been listed in Hong Kong on the one hand, and more foreign capital has come into Chinese market by means of Hong Kong market on the other hand. These two facts give rise to the stronger connection in Chinese and Hong Kong stock market. The correlation coefficient between exchange rate and Chinese stock market has a large fluctuation in the sample period when exchange rate rose, and has a small fluctuation in the sample period when exchange rate leveled off, which shows that exchange rate is dominant.To sum up, there exists co-movement in Chinese and the major international stock markets, but it is mainly shows that Chinese stock market has been affected by the information of international stock markets, and it is difficult that Chinese stock market transmit some information to the international stock markets except Hong Kong. It exists spillover effects to the volatility of mainland stock market when RMB exchange rate changed, but not vice versa.