The Interaction Between Foreign Exchange Market And Capital Market In The RMB Internationalization

The importance and necessity of RMB internationalization is becoming increasingly clear, and China will continue to promote this progress in the future. As key components of the financial market, foreign exchange market and capital market are closely inter-correlated. In the process of RMB internationalization, a series of changes will take place in the foreign exchange market, monetary market and capital market, such as the exchange-rate regime revolution, interest marketization and the opening of capital market. What impact will these changes bring to the inter-correlation between the two markets? Through which channels? What about the causality between the two markets? Whether volatility spillover effect exists between the two markets? What realistic significance does the result bear? Proceeding from these questions, this paper studies the interaction between the two markets in the dynamic background of RMB internationalization, beginning with the prices in the two markets.In the first place, this paper concludes the previous researches, and then studies the exchange-rate regime revolution, interest marketization and the opening of capital market, and then conducted theoretical analysis on the interaction and transition channels between the two markets. In the next, this paper selects proper indicators based on theoretical significance, and chooses OLS, VAR and MGARCH-BEKK models, adopts cross-product term analysis, rolling window analysis to answer the questions above.The result suggests that, the marketization and elastification of exchange-rate regime has promoted the correlation between the two markets; in the short term, the effects of capital market opening degree has no definite impact on the correlation between foreign exchange market and capital market, but in the long term it enhances the correlation greatly:before the exchange rate reform, no Granger causality exists between stock price and exchange rate, after the exchange rate reform, the change in stock price will lead to the change in exchange rate in the short term, while the change in exchange rate will lead to the change in stock price in the long term; interest rate stands as an important channel in the transition from stock price to RMB exchange rate:the transition of changes from RMB exchange rate to stock price is not fluent enough, and monetary supply stands as the main channel. This result verifies that the strict regulation and RMB exchange rate revolution has led to asymmetry in the inter-correlation between the stock market and foreign exchange market. Before the RMB exchange rate revolution, no volatility spillover effects between foreign exchange market and stock market, while after the RMB exchange rate revolution, volatility spillover effect emerges from the foreign exchange market to stock market; interest rate, export and import all stand as clear channels in the impact transition from bond market to foreign exchange market, and interest and import stand as clear channel in the impact transition from foreign exchange market to bond market. No volatility spillover effect exist between foreign exchange market and bond market.Finally, this paper put forward policy suggestions, points out that due to the difference’in the volatility spillover effect with the foreign exchange market, in the process of capital market opening up. bond market should go ahead of stock market, in case that the volatility spillover effect leads to market fluctuation and disorder.