Empirical Research On The Correlation Between The Exchange Rate And Stock Price

Along with the growing degree of the global economy integration, the correlationbetween the exchange rate and stock price is much stronger than before. In2005, thereformation of RMB exchange rate system and the equity division in the mainland ofChina, made the floating range of RMB exchange rate further widened and the stockshares in different holders traded freely. The two reforms significantly improve thecorrelation between the foreign exchange market and the stock market in themainland of China. At the same time, the Mainland and Taiwan have differenteconomic and political systems. What’s more, with the deepening of the cross-straitfinancial cooperation and the growing voice of national reunification, it’s essential tostudy the relationship between the exchange rate and stock price in the Mainland andTaiwan.Based on the previous research, firstly, this article analyses the application of thetwo classical theories (flow-oriented model and stock-oriented model), the fourtransmission mechanisms of how the exchange rate and stock price influence eachother (the transmission mechanisms are interest rate, international trade, moneysupply and psychological anticipation), the influence of the exchange rate system,and the advantages and disadvantages of the correlation between the exchange rateand stock price. Then, combining the qualitative and quantitative method, comparethe present situation and development history of the exchange rate system, thecharacteristics of the stock market and the security regulatory system. And then usethe co-integration test, granger causality test and BEKK-VAR-MGARCH model toverify the correlation between the exchange rate and stock price in the Mainland andTaiwan from2012.4.16to2013.8.30. The empirical result shows that: firstly, there isno long-term co-integration relationship between the exchange rate and stock priceboth in the Mainland and in Taiwan; secondly, there exists obvious mean or volatilityspillover in short term. As for Mainland, there exists unilateral mean spillover fromthe exchange rate to the stock price and bilateral volatility spillover between the exchange rate and stock price. As for Taiwan, there exists bilateral mean spilloverbetween the exchange rate and stock price and unilateral volatility spillover from theexchange rate to the stock price. At last, based on the empirical results, we comparethe differences of the correlation between the exchange rate and stock price in theMainland and Taiwan, analyze the reason, and put forward some policy suggestionson how to improve the financial market and guard against the financial risks.