China's Monetary Policy And Stock Market Price Behavior, Empirical Research

The transmission mechanism of monetary policy is an important problem of the monetary policy theory. The appearance of stock market brings one of the greatest challenges to the traditional monetary policy transmission mechanisms. In fact, the channel of stock market of monetary policy is composed of two steps: how to pass monetary policy to stock market and how stock market affects the real economy. As the first step in the stock market channel, the interaction between stock price behavior and monetary policy plays a key role in the whole process, so we focus on this part in this paper.The studies about this area, however, are a little bit incompact. This could be explained by the fact that the subject lies between the fields of monetary economics and financial economics. So the approaches excessively inclined to either field will probably restrict a deeper research in this area. In this paper, based on the literatures in existence, the author does a thorough and systemic research on monetary policy and stock price behavior based on China's data. In part III, a series of modern econometric methods such as Cointegration analysis, VECM, Impulse response, and Variance decomposition are used to analyze the monthly data of monetary policy and stock market. Since the lending rate in China which is one of the most important instruments of the monetary policy is controlled by the government, In part IV we use GARCH model to analyze the announcement effect of the policy in China.The main contents and conclusions are as follows: (1) Applying the econometric method, the paper studies whether monetary policy has effect on stock return and volatility. The results shows that Chinese monetary policy seems to exert an influence on stock prices, however, each instrument of monetary policy plays a quite different role during the interaction process with the stock market; (2) Studying empirically the influence mechanism between monetary policy and stock price, the author finds that the changes of Chinese monetary policy, firstly, have effect on the money in bank and further on stock returns, and it is imperative under the situation to take some effective measures to connect the money market with the stock market. (3) By employing the empirical method to analyze the monetary policy announcement effect, we draw the conclusion that whether Chinese monetary policy announcements have announcement effect or not depends on the anticipation of the market investors to the policy adjustment.