The Relationship Between Money Supply And Stock Market Prices Of Empirical Research

The relationship between monetary policy and stock market is the forefront of financial research. By using the latest data and mature econometric models, we did an in-depth study of the relationship between money supply and stock market prices, in order to further understand the interaction between stock market volatility and monetary policy.The first chapter introduced the background of the study and the structure of the article.Chapter II summarized the empirical research findings of foreign and domestic academics on the relationship between money supply and stock market prices. These studies commonly used VAR and Johansen Cointegration Test. Because of the selected samples and variables, their empirical results are different. Domestic scholars studied not deep enough in the following three topics: the relationship between the change over the same period of the previous year of money supply and stock market volatility, the relationship between M2 components (such as demand deposits, savings deposits, etc.) and stock market prices, the relationship of different periods between money supply and stock market price. We did a tentative empirical research on the above topics.Chapter III illuminated the interaction mechanism between money supply and stock prices. On the one hand, the stock market fluctuations led to changes in money supply by affecting the real economy and money demand; on the other hand, the changes in money supply, by influencing real output, market interest rates and investor asset allocation, change the demand for the stock, causing the stock market fluctuate. This part provided a theoretical basis for the empirical research.The fourth chapter through descriptive analysis found the change regularity between money supply and stock market price, pointing out the possibility of interaction between China money supply and stock prices, which provides ideas for building the empirical model.The fifth chapter is the core of this article, using vector autoregressive models and vector error correction model finish the empirical studies on the relationship between different levels of money supply and stock market prices. We got the following conclusions: First, during 2000 to 2010, the changes of M2 had a positive effect on stock market prices, in which the changes of savings deposits caused the stock prices fluctuate, while the changes of cash in circulation, demand deposits, time deposits and other deposits had no significant effect on stock market prices. Moreover, the net increment of domestic credit had a significant impact on stock market prices.Second, during 2000 to 2010, stock market prices had a positive impact on M1 and M2, but had no significant effect on M0. The changes of stock market prices caused demand deposits and other deposits change in the same direction, while causing time deposits and savings deposits reverse change. Meanwhile, the stock market price changes had a significant impact on the net increment of domestic credit. Third, the relationship between China's money supply and stock market prices in different periods showed different characteristics. The relationship between the two gradually strengthened.From the perspective of the money supply, we point out that using broad money supply M2, household savings and domestic financial institutions credit balance can help investors make more accurate judgments on the stock market trend in future.