Study Of The Relationship Between RMB Exchange Rates And China`s Stock Market

The relationship between exchange rates and stock market is an important issue of theopen economy macroeconomics research. It has already attracted a lot of attention in Westernacademic area. In China, the development of the RMB exchange rate market and stock marketstarted late, with a corresponding study of the relationship between the two is relativelylacking. However, with the steady progress of financial market reforms, economic openness isincreasing fast, systematic and comprehensive study of the relationship between the RMBexchange rate and China’s stock market has become a more and more important issue to besolved.Research objectives of this paper are: Build a theoretical model to explain the relevancebetween the exchange rate and stock price; On this basis, by using of the RMB exchange rateand stock index data, the paper discussed the volatility characteristics of RMB exchange rateand stock market, the information spillovers between the two conduction, internal economicrelations and increasing economic openness increase the impact of their relationship, so thatthe paper will provide some advice to the government, businesses and individuals aboutdecision-making and behavior reference.Firstly, the paper sorts out the process of China’s economic openness, respectively, fromthree important aspects——the RMB exchange rate regime, capital account liberalizationprocess and the mercerization of interest rates. With the reform and liberalization of thefinancial markets, the relationship between sub-markets will change and develop.On the theoretical research part, the paper not only integrates the traditional rate-orientedmodel and stock-oriented model to analyze the share price and exchange rate risk pathways,but also through the IS-LM-BP model, discusses the macroeconomic system with Chinesecharacteristics to get a conclusion that there is a positive relationship between the stock priceand exchange rate. Then, the paper adds to economic openness on the basis of the equation,further explaining the increasing economic openness will exacerbate the relationship betweenthe two.On the empirical research part, the paper use the first daily-data of July22,2005toDecember31,2012to build a VAR-EGARCH model to investigate the spillovers of RMBexchange rate and the stock market, the study found that: the foreign exchange market there isonly one way to guide the relationship between the stock market short term and the exchangerate is affected by the degree of stock market volatility is less than the stock market by theimpact of exchange rate fluctuations.Then, the paper selects monthly data from August2005 to December2012to build a SVAR model. The result shows that there is an inherent linkbetween the stock and exchange market related to macroeconomic variables, the currentstock market returns come with RMB positive correlation between the rate of change inexchange rates, and economic output is the most important factor,besides the others are verysmall.Finally, by adding economic openness variables, empirical result comes up with theincreasing economic openness strengthens the reverence between exchange and stock market.In the end, according to the conclusion and the process of China’s financial marketreform, the paper provide some policy recommendations.