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The Yuan Against The Dollar Exchange Rate Fluctuations Affect The Empirical Study Of Chinese Stock Prices

Posted on:2013-09-17Degree:MasterType:Thesis
Country:ChinaCandidate:L F YanFull Text:PDF
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The foreign exchange market and the securities market are two major sub-markets of financial markets. The exchange rate is the price of the foreign market, while the price of the stock market is the signal of one country economy. The close relation and the mutual influence between the foreign exchange market and the securities market have an impact on economic stability and development in China. Especially the July21,2005of RMB exchange rate regime reform, exchange rate volatility has significantly increased, the stock market has experienced a rose and then fell cycle trend. In this context,research on the RMB against the U.S. dollar " impact on stock price in China has great significance. It helps investors to rationalize the structure of its investment assets, which is based on the expected economic situation; the monetary authorities can also use the foreign exchange impact on the stock market to change its policy content in order to achieve macro-control goals.Firstly, the theoretical part of this article reviews the basis price-decided theory of exchange rate and stock, and use the general equilibrium methods to research the stock market,which is within the framework of traditional Mundell-Fleming (M-F) model under the conditions of open economy, and come to a conclusion that there is a negative correlation between stock price and exchange rate. Then elaborate the transmission mechanism from exchange rate to stock price which the intermediations are interest rates, money supply, import and export trade, international fluid capital and psychological expectations.Secondly, to empirical test the effectiveness of the transmission mechanism in Chinese market, this paper selects nominal exchange rate of RMB against the U.S.(SR), the closing price on the Shanghai Composite Index (SI), the inter-bank weighted average lending rates seven days (IR), generalized money supply (M2), total imports and exports (TRADE) and direct investment (FDI) as the representative indicators, and the monthly data samples are from July2005to July2011. The results show that the money supply, foreign trade and international capital flow-mediated transmission mechanism is effective in the Chinese market. Although the results show that the correlation between interest rates and stock prices is significant, but there is no significant correlation between the interest rate the RMB exchange rate, leading to the interest rate transmission mechanism in China is not smooth. Then analyse the international short-term capital through short-term external debt, foreign direct investment, qualified foreign institutional investors and other channels into China, and too much volume of money supply caused by foreign exchange reserves surge.Both of them will affect the stock price by changing the amount of capital supply and demand of China’s stock market.Thirdly, the empirical part establishes the VEC model, in which the five variables are stock price, exchange rates, interest rates, money supply and the international flow of capital. The results of cointegration test, Granger causality test, impulse response and variance decomposition analysis of the model show a negative correlation between RMB exchange rate、interest rate and stock price, and a positive correlation between money supply, the international flow of capital and stock price. But in the long term, only the RMB exchange rate and stock price are positive related,the other three variables show a negative correlation with stock price. The RMB exchange rate, interest rates, money supply and the international flow of capital stock are Granger causes to stock price. The four variablescontribution on stock price arrangement:the international flow of capital, exchange rate, money supply, interest rates.Finally, this paper proposes some policy suggestions for promoting the development and coordination of China s foreign exchange market and constructing a benign interaction between exchange rate and stock price.
Keywords/Search Tags:exchange rate, stock price, transmission mechanism, vector error correction model
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