Relation Research Between Exchange Rate Fluctuations And Stock Price Changes: Based On Chinese Data

With the development of economic integration,the relationships among differentfinancial markets become more and more closely, although the exchange rate and stockprice belong to the foreign exchange market and the stock market, both of them areessential factors of the financial markets. Since the collapse of the Bretton WoodsSystem, the relationship between exchange rate and stock price also gradually emerged.For instance, in the20th century, the nosedive of the yen and the baht have significanteffect on the entity economy market. On this background, this paper will study therelationship in order to provide some policy by institutional analysis and empiricalresearch.On the basis of combing previous studies we found that: in theory, the linkagemechanism between stock price and the exchange rate includes international trade,money supply and demand, interest rates and psychology; at the same time, theexchange rate regime, international mobility of capital, financial structure and foreigntrade dependence factors can also affect the two relations; under the condition of openeconomy, there is bidirectional causality between stock prices and the exchange,exchange rate fluctuations can affect the stock price changes, the stock price movementscan also change the exchange rate. Through the commodity market, there is a positiveassociation between exchange rate and stock price; By the transmission path of financialmarkets, stock price have negative significant correlation with exchange rate; Changedirection depends on the size of the two, If the commodity market is bigger, there mayhave a same change trend between them; If the financial market is more open, theexchange rate and stock price are more likely to move in the different directions.On demonstration aspect, This paper use daily data of China from July21,2005to July19,2013, the exchange rate for RMB, the Shanghaicompositeindex, the whitehome electrical appliance industry stock price index, crude oil stock price index,Pudong and Tibet tock index.By relying on the methods of Granger causality test andVAR Model, the empirical results show that: In china, here is a long-run relationshipbetween two timeseries. What’s more, the relationship is not bidirectional, there is onlya causality from the exchange rate of the RMB to stock prices measured by theShanghai composite index; the share price of importer enterprises rise while theexchange rate down, for export enterprises it is not obvious; on the developed Financial market exchange rate and stock price change in the same direction, when productmarket is more mature, the exchange rate and share price presents a reverse relations,while it is just exact contrary.Finally puts forward the suggestions: On the one hand, we should expand foreigntrade and stimulate domestic demand to promote the stability and prosperity ofcommodity market. On the other hand, promote the healthy development of the stockmarket, the foreign exchange market, and the capital market.