Exchange Rates On Stock Prices

Nowadays, along with the strong appreciation expectation of RMB currency, the Chinese stock market steps into its bull time. Therefore, it is commonly recognized that the appreciation expectation of RMB has greatly inspired a bullish market in China. Theoretically, currency exchange rate and the stock price are interconnected by two ways of capital account and current account but there is no mature theory or model which could be regarded a uniform platform to analyze the relationship between the currency exchange rate and the stock price so far, nor common conclusion has been accepted. A popular empirical analysis model widely adopted by scholars both home and abroad is to stimulate and regress data within a selected zone. However, lacking of the support of sufficient theoretical criterion, this analysis model is too empirical and always leads divergent results.This article concludes a general model to demonstrate the relationship between the variation of currency exchange rate and that of stock price, by deducting the mended models of relationship between variation of currency exchange rate and that of stock price in virtue of the theory of purchasing-power parities (PPP) and Golden model of stock price. According to the model, currency supply, interest rate, the international capital flow drawn by the variation of exchange rate and its expectation are the major points. Among the factors, the exchange rate impact the stock price through the currency supply and the interest rate as the two are the functions of exchange rate.As the model show, there's no absolute positive or negative relationship between exchange rate and stock price of one country. According to the commonly economic hypothesis, when the exchange rate appreciated, the balance of payments will get negative influence, the foreign exchange reserve and the basic currency and the total currency supply will decreased, therefore, the common price and the stock price will suffer negative influence. Along with this, the international capital flow drawn by the variation of exchange rate and its appreciation expectation will improve the stock price which opposite to the influence drawn by currency supply. So we must compare the extent affected by the two when considering the influence of stock price drawn by the exchange rate. Synthetically, there's no consistent conclusion. What need more attention is that the precondition of conclusion of the decrease of currency supply is the result of exchange rate appreciation is a small open country, when comes to a big open country or within a special period, the appreciation of exchange rate may improve the international trading condition, which will increase the foreign exchange reserve as a opposite side of the common conclusion.As a big open country, China has a high proportion of process trade and foreign capital company, and Chinese Yan variated differently to different other currencies, so the foreign reservation increases when the RMB appreciates to US dollar At the same time, international capital flows heavily into China stock market for the mightiness expectation of appreciation. Although there's no official statistics, this way can not be ignored by the sideway statistics. In addition, although China has increase the interest rate time by time, the goal doesn't include the short-term interest rate, which means no attraction to international capital. So the interest rate doesn't compose the reason of the increase of stock price.Synthetically, at the given period along with the condition that RMB exchange rate improves the international trading condition, the influence to the China's A stock price drawn by exchange rate is positive. But as the time goes, the relationship between the two will change when some preconditions changes.