The Impact Of China And The U.S. Monetary Policy On Stock Market Returns:a Comparative Analysis

The stock market is an important part of modern financial system. Among all financial assets, stock price has the closest relationship with economic condition and financial environment. With the expanding scale and improving influence, the significance of Chinese stock markets has been increasingly strengthened. Considering these, the study of Chinese stock market has become a cutting-edge subject in financial research. In recent years, due to the change of international and domestic economic situation, we observed a repeated adjustment of monetary policy in China, which giving a practical significance to studying the relationship between monetary policy and stock market.With a research range from 2007 to 2013, this paper carried out the empirical research by using VAR model. The returns of different sized stock markets may show varied characteristics in its movements and the sensitivity to monetary policy. In this paper, we distinguished the main board stock market and the small and medium-sized stock market in China and the United States, so the response of different sized stock market to monetary policy changes would be respectively studied. At the same time, choosing the money supply and interest rate as two respective indexes to measure monetary policy changes, we established several empirical models for the empirical research.The empirical results show that an increase in money supply will have a positive impact on stock return of the two sized market in China and the United States. Both in the main and small and medium-sized board market in China, the empirical results also support the opinion that an increase in interest rate would lead a negative impact on stock market returns. The different responses in stock market returns of China and the United States to the money supply change can be found in the comparative analysis. Summing up the main points, both in mainboard and the small and medium-sized stock markets, the U.S. money supply growth has a stronger influence and explanatory power on stock market returns changes than the Chinese money supply growth.This article explored the possible causes of the differences from three aspects. (1) The stock and bond substitution effect:an increasing yield curve of Chinese bond market will weaken the stock investment attraction, while the downward in the U.S. bond market yields will strengthen the substitution effect form bond to stock. (2) The expectation effect form monetary policy:with the consistency of the fed’s easy monetary policy as well as the quantitative easing method aiming to boost investor confidence, a money supply increase will be more likely to lead investors producing optimistic expectations. (3) Market structure difference, specialized investment institutions, such as the mutual funds, having a more accurate interpretation of the monetary policy and tending to a more rational investment behavior, are the backbone of the U.S. stock market, so the U.S. stock market will have a more smoothly Monetary transmission channel.