A Study On The Correlation Between RMB Real Effective Exchange Rate And Chinese Stock Market Price

The foreign exchange market and the stock market are two important components of the financial market. According to historical experience, huge adjustment often happens in both foreign exchange market and stock market in the same time. At the beginning of year 2016, China’s stock market plunged nearly 7%, while the RMB exchange rate reached its lowest point in 5 years, depreciated 600 basis points. Therefore, what is the connection between the foreign exchange market and the stock market? Different from the nominal exchange rate, whether the real effective exchange rate which considered inflation and the trade ratio can further explain the relationship between exchange rate market and stock market? That is the starting point of this paper.The influence factors of the price fluctuations in the stock market and their transmission mechanism has been a hot issue in the economic and financial research field, among which the relationship between exchange rate and stock price is significant either in theory and practice level. By selecting the real effective exchange rate of RMB as the breakthrough point, this paper studies the relationship between the real effective exchange rate and the price of Chinese stock market.This paper firstly make a literature review of the relationship research between the exchange rate and stock market price systematically, indicating that in the post crisis era most studies are focused on the nominal exchange rate, which lacks the real effective exchange rate (REER). Therefore, the RMB real effective exchange rate impact on China’s stock market price and the conduction mechanism were analyzed and sorted. Furthermore, under the background of financial crisis and China’s special financial market environment, and the correlation between the two may change was proposed by combining theoretical analysis and experiences from other countries. Finally, in order to validate the theoretical analysis through empirical method, the unit root, co integration analysis, Granger causality test, vector error correction model, impulse response function and variance decomposition and measurement tools, are carried on the analysis to the sample data.This paper studies indicate that RMB real effective exchange rate and Shanghai Composite Index which represents Chinese shares have long-term cointegration relationship. And crisis made the relationship between the two changes from positive to negative. The interaction between REER and stock market also alters, from before the crisis mode of exchange rate leading into the "stock market leading model. In addition, after crisis era the impact of time delay was significantly shorter, which means the market became more cautious to good news. Based on the results of this study, the relevant policies and countermeasures are put forward.