Empirical Analysis Between RMB Exchange Rate Misalignment And Stock Volatility

Since the Second World War, the Breton Woods System with the dollar as center disaggregated, countries from all over the world gave up fixed exchange rate system, started to carry out managed floating exchange rate regime, the degree of volatility in the foreign exchange market expands. The influence between the foreign exchange market and the stock market gradually is paid attention to by financial economists. Asian Financial Crises in1997also states, in open economy, the relationship between foreign exchange rate and stock market becomes more and more closely. Since2005, our country started to implement floating exchange rate system, which was taking the market supply and demand as the foundation, referring to a basket currency. The RMB exchange rate no longer observes closely sole US dollar, forms the richer elastic RMB exchange rate mechanism. As the same time, we implement the spilt share structure reform in stock market. The stock index reflects the whole economic situation in a certain extent. After the outbreak of the International Financial Crisis, developed countries economy has been hit hard firstly, for the dual pressures to save the domestic economic growth and employment stability, the developed countries have launched all kinds of loose monetary policy one after another, such as QE1, QE2and QE3, which leads to our currency appreciation. In this context, it has important theoretical value and practical significance to strengthen the study between exchange rate change and stock price volatility.In content, this paper has two major parts.(1)Measuring RMB equilibrium exchange rate and exchange rate misalignmentFirstly, this paper elaborates international commonly used five types of equilibrium exchange rate theory:PPP, FEER, NATREX, BEER, ERER. Four of them are put forward based on unique economic characteristics in developed countries, and ERER considers low degree of opening to the outside world, controlled capital account, dual exchange rate etc in developing countries economy.Next, Combined with China national conditions, this paper considers ERER development research about Liao Yigao and Lv Jianglin, Wang lei, uses annual data from1990to2011, establishes the model between RMB exchange rate and government spending, government tax balance, economic degree of opening, terms of trade, net foreign capital inflow through theory and econometric analysis. Empirical results show that in addition to government spending on RMB exchange rate is not significant, government tax balance, economic degree of opening, terms of trade and net foreign capital inflow have different degree influence on RMB exchange rate, among them, the highest influence is government tax balance, followed by economic degree of opening.Finally, for eliminating influence of the transient factors, this paper carries HP filter test to obtain the equilibrium value of the above variables, measures RMB equilibrium exchange rate by plugging the equilibrium value of the above variables into the long-term equilibrium exchange rate model, and uses the definition of exchange rate misalignment to calculate the exchange rate misalignment. The results find that, from1990to1996and from2003to2007, the exchange rate misalignment is below zero, RMB exchange rate is undervalued; from1997to2002and from2008to2011, the exchange rate misalignment is above zero, RMB exchange rate is overvalued.(2) Empirical test between exchange rate misalignment and stock volatilityFirstly, this paper elaborates two-way transmission mechanism between exchange rate change and stock volatility from intermediary variables perspective of interest rate, import and export trade, money supply, expectations. Next, the influence of the relationship between RMB exchange rate misalignment and growth rate of Shanghai composite index is theoretically discussed. Finally, based on the granger causality test of RMB exchange rate misalignment and growth rate of Shanghai composite index, the results show that RMB exchange rate misalignment isn’t the granger reason of stock volatility, stock volatility isn’t the granger reason of RMB exchange rate misalignment. Then, from the perspective of foreign exchange market, stock market, and interest rate, money supply, this paper gives reasons and policy recommendations.The main innovation point of this paper is that, predecessors study the relationship between exchange rate change and stock volatility mainly from the perspective of RMB exchange rate rather than RMB exchange rate misalignment. But it has two shortcomings:(1) due to the availability of data and empirical interoperability, this paper ignores interest rate spreads and money supply of RMB equilibrium exchange rate model, which makes the calculation of RMB equilibrium exchange rate have a certain deviation.(2) due to the limitation of knowledge and ability, this paper only carries on empirical analysis on the relationship between RMB exchange rate misalignment and stock volatility, and no further carries on empirical analysis on its transmission mechanism from the intermediary variables perspectives of interest rate and money supply.