Research For The Tail Dependence Between Chinese Stock And Foreign Exchange Markets

As a core part of financial market, Chinese stock market and foreign exchange market jointly take some important responsibilities, such as financial intermediation, resource allocation, risk diversification, economic adjustment and so on. With the reform of shareholder structure and the mechanism for setting the RMB exchange rate promoting, stock market and foreign exchange market have gradually embarked on the market-based road, resulting in that the linkage relationship between them increased to a new degree, and great amount of relating researches are carried out on the field.Depending on the feature of stock market, this paper classifies Chinese stock market into four parts. Part one is the export-oriented industry, made up of the textile and garment industry, the appliance industry, machinery manufacturing industry and so on. The paper industry, the petrochemical industry, and the iron and steel industry are involved in the import-oriented industry, called part two. Part three contains the aerospace industry, who has got a large number of foreign exchange liabilities. The last one is used as a reference, including the agriculture, forestry, animal husbandry and fishery industry. This paper is trying to study the tail dependence between foreign exchange and the representative industries.Weekly data from August2005to December2013is chosen to conduct unit root test, heteroscedasticity test and autocorrelation test. As a result, there is no unit root in the log-differences, but with heteroscedasticity and autocorrelation. In order to eliminating the effects of heteroscedasticity and autocorrelation, an ARMA(p,q)-GARCH(1,1) model is built to filter data. After then, this paper applicates a nonparametric method about time-varying mix Copula to do the empirical test.The empirical results are as follows. For the export-oriented industry, there is significant tail dependence in the same direction between the stock price and foreign exchange. In other words, the probability of synchronous extreme earning or extreme loss from the two markets is high. When balance the portfolio, it is a bad choice to hold too much assets of them. In contrast, the tail dependence between the stock price of the import-oriented industry and the exchange rate is low. One may hold the import-oriented industry stock and assets related to the exchange rate at the same time to resist risk coming from the whole word.At last but not the least, policy makers should pay close attention to international trends, and shift policy immediately based on the linkage relationship between foreign exchange and the representative industries from this paper. This will promote a stable and healthy development of Chinese financial markets.