| In early 1990s, with the SSE and SZSE setting up, China’s stock market has developed rapidly. By the end of 2013, the total market capitalization of the Shanghai and Shenzhen stock market achieved 23.76 trillions, accounting for 41.8% of the total annual GDP. There are both advantages and disadvantages. The advantage is that it can raise funds, optimize the allocation of capital to promote the development of the real economy; the disadvantage is that sharp fluctuations in the stock market will have an adverse impact on the real economy. Monetary policy refers to various monetary policy tools the central bank use to regulate the economy index, which affects on the overall economic measures. Therefore, the relationship between monetary policy and the stock market has become a hot topic in financial economics. This paper mainly studies the impact of China’s M2 and interbank interest rates on the stock market return and volatility.The stock market is influenced greatly by the economic and financial environment. For example, America subprime crisis indirectly causes our stock market crash. This paper includes the M2 measure of money supply, seven days interbank interest rate, stock market returns and volatility in MSVAR model, and market state divides market state into tightening monetary policy, expansionary monetary policy and special time period, to study the effect of monetary policy on the stock market return and volatility in different states.The results show that, the M2 and interest rate shocks have significant effects on the stock market. But in different states, there was a significant difference in effect, mainly in the direction and degree of influence. Therefore the central bank must take full account of the current economic situation in setting monetary policy. At the same time, the orders of magnitude by M2 and interest rate effects on the stock market can be compared, influences the money supply is greater than the interest rate on the stock market. |
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