A Study On The Interaction Between Foreign Exchange Market And Stock Market In China In The Process Of Financial Opening-up

The twelfth five-year plan has set up its goals to improve the RMB exchange rate regime and gradually make RMB convertible under capital account, pushing financial opening-up forward. In future, the RMB exchange rate will be more elastic, while the capital market openness be enhanced, which would bring the domestic financial markets with greater external shocks. The burst of Japan’s economic bubble and Asian Financial Crisis has warned us of negative impact on financial markets and real economy brought by the alternating shocks between foreign exchange market and stock market. Therefore, the research on the interaction between the two markets is meaningful as to keep the financial markets and real economy stable and healthy.Scholars home and abroad have done plentiful research on the interaction between foreign exchange and stock markets. Some of them show the bidirectional causalities of the two markets. Others demonstrate the existence of only one-way causality or even none. The conclusion is various, which means the interaction is irregular. However, relative patterns can still be discovered from irregularity.This paper aims to study the interaction between foreign exchange market and stock market especially from the view of financial opening-up. First, combining classical theories with financial openness in China, this paper theoretically discusses the interaction between the two markets. Second, the paper divides total sample period into three sub-periods according to the exchange-rate regime, and testifies the spillover effects in the process of exchange-rate reform through the VAR-MGARCH-BEKK model. Third, an index of capital account openness is built. By applying rolling window, the paper presents the influence of capital openness on the correlation of the two markets.The empirical analyses show that before the second exchange-rate reform, RMB exchange rate can be used to predict stock price, and there are bidirectional volatility spillovers between exchange and stock markets. After the exchange-rate revolution restarts, there exist bidirectional mean spillover effects between two markets, while the volatility spillover is non-significant. The openness of capital account enhances the two markets’ correlation, and with the deepening of capital liberalization, its positive effect on the correlation is reduced. The financial contagion can be relieved by further financial reformation.In the end, the paper provides some advice on the exchange-rate reform and capital account liberalization based on the overall conclusion, in order to have the financial revolution carried out in a stable market circumstances.