An Empirical Study Of The Relationship Between RMB Exchange Rate And Stock Price

As we all know, there are two important parts of the modern financial market-the foreign exchange market and the stock market. On the one hand, foreign exchange market operates foreign currency and foreign currency-denominated securities, reflecting the relationship between a country’s currency parity with world currency. On the other hand, the stock market has always been known as the country’s barometer of economy. Since the linkage between the two markets increasingly shows a profound impact, this relationship has been the debate topic among scholars even up to now there is no final conclusion. Scholars from various countries come to three basic views in different ways that there is no relationship between the exchange rate and stock prices, there is one-way relationship and there is two-way relationship. To explore the inherent relationship between the two varieties in Chinese market, the research can discuss the conducting mechanism from theoretical aspect and the relationship from empirical aspect.In order to verify the specific relationship, it requires not only theoretical research, but also empirical process. In this paper, since the selected exchange rate and stock prices are all time-series data, to study the relationship between them, I need a regression to determine the coefficients to analyze economic significance. First, I used stationary test, cointegration and build error correction model. I also used Granger causality test to confirm the relation.This paper is divided into five parts. First part Ⅰ described the historical background and made summary form four basic theory. The second part focused on the concept and determinants of exchange rates and the transmission mechanism under different exchange rate regimes (fixed and floating exchange rate regime). The third part introduced the method of research and data processing, with the reason why I selected indicators, data and the time period, and the model derivation. The fourth part is to empirically test and build a model for further explanation. The last part is the conclusion of the analysis, combined with China’s national conditions to discuss the empirical results and interpret the current policies.By constructing error correction model and Granger causality test I get the following three conclusions. First, by using EG two-step method, residual sequence shows non-stationary before the reform and that means no long-term equilibrium between exchange rate and stock price. While the data after reform proves the existence of a long-term co-integration relationship between the RMB exchange rate and stock prices. Second, evidence show a marked causality from exchange rate to stock price and a non-marked causality from stock price to exchange rate by Granger causality test. Third, to build the error correction model and to estimate regression, further empirical findings prove the one-way relationship from the RMB exchange rate against the U.S. dollar to the Shanghai stock index in both long-term and short-term and no relationship from stock index to exchange rate.The feature of this paper is the combination of analysis and empirical testing and the use of modern econometric time-series regression methods for data analysis and processing. On the theoretical aspect, there exists conducting variables between the exchange rate and price. On the empirical aspect, I used a variety of econometric methods and investigated the relationship between exchange rates and stock prices from two directions. Meanwhile, I examined the impact of exchange rate policy before and after the RMB exchange rate formation mechanism reform. But the article also has shortcomings, such as the shortage of index in empirical process with the only analysis of the A-share index. In addition, during the selected period, there was the global financial crisis.But I did not remove this part of the factors. This will be the direction of my follow-up study.