The Impact Of Financial Crisis On The Correlation Of Exchange Rate And Stock Market

China began the implementation of the exchange rate reform that RMB exchange rate no longer tacked the single US dollar and the managed floating exchange rate no longer tacked the single US dollar and the managed floating exchange rate system came into force since July21,2005.The exchange rate system is based on the market’s supply and demand and adjusted according to a basket of currencies. After this reform,RMB exchange rate is in presence of hiking trend, especially in2007,the rate climbing up in dramatic way.And the RMB exchange rate reached6.98RMB/USD at April,2008,since it was8.11RMB/USD at the day before the reform.However,since August,2008,there were inappreciable fluctuation in the RMB exchange rate lasted until March,2010.The Shanghai and Shenzhen300Index also kept going up.However,after the subprime crisis,the stock market experienced the most terrible winter.Behiend the complicated relation between the RMB exchange rate and stock prices,is there a real link? Is the financial crisis have certain impact on the relation between the RMB exchange rate and stock prices?Some research have done for the link between exchange rates and stock market at home and abroad, but the results are different because of the different models and datas. Our country have also done some research about the correction of the RMB exchange rate and China’s stock market. Similarly, because of the different datas and models, the results are very different. On the choice of RMB exchange rate, most research has focused on the yuan against the dollar intermediate exchange rate and the effective exchange rate. The choice of stock has focused on the index A shares, B shares in Shanghai (SSE) Composite Index. The time of sample is divided mainly to the time of the exchange rate reform on July21,2005as a watershed. In the previous literature, some have researched the relationship between exchange rates and stock market exchange rate reform, and some have researched the link between the two after the exchange reform, while others study the impact of exchange rate reform on the relationship between the two. Some foreign literature has studied the1997Southeast Asian financial crisis on the Korean exchange rate and stock market relationship.The paper includes6parts arranged as follows:The first part is the introduction, it describes briefly the research background,significance,research methods, research content, framework and innovation of this paper, the definition of some concept. The second part is Literature review and theory analysis. We look back the empirical research on the relationship between the RMB exchange rate and stock prices.The theory analysis begins from the basic theory,and makes a comprehensive analysis of the mutual influence and the channel of conduction between the exchange rate and stock prices. The third part is the theoretical model and statistics data which we make use of in the paper.The fourth part is an empirical study on the relationship between the RMB exchange and stock prices. This is the focus of this paper. We use daily data. Meanwhile we utilize unit root test, co-integration test, granger causality test, VAR model, impulse response function and CHOW test. In the fifth part we make a elaborate explanation for the empirical result. In the sixth part we put forward material policy advices to enhance the efficiency of exchange rate market and stock market.As for the above-mentioned empirical analysis, we get the following results: Exchange rate and stock index have long-term stable relationship, expressed as a negative relationship between the RMB exchange rate and stock index. At the background of direct quotation, the RMB exchange rate change performance for the devaluation of the Renminbi, so RMB currency and stock index is in a positive relationship:when RMB express appreciation (depreciation), stock express price up (down). This is the same with the conclusions of many scholars. In the long term, before the financial crisis, the relationship between exchange rates and stock market agree to the flow oriented model; but after the financial crisis, the relationship between exchange rates and stock market agree to the stock-oriented model. Before the financial crisis, the impact of exchange rate changes on stock market is bigger; the impact of the change in stocks on the exchange rate is smaller; but after the financial crisis, the smaller the impact of exchange rate changes on the stock market, the impact of the change in stocks on the exchange rate is bigger. Before the financial crisis, there is unidirectional Granger causality from exchange rate to stock index. After the financial crisis, there is two-way Granger causality existing in the exchange rates and stock prices.