An Empirical Research On The Correlation Between RMB Exchange Rate And Stock Price-Based On Nonlinear Relationship

Foreign exchange market and stock market are two important part of a country’s financial markets. As China’s gradual elimination of capital inflow barriers, the close relationship between the domestic and international economic and financial market may strengthen the comovement between the foreign stock index and currency value and accelerate risk transmission between foreign exchange market and stock market. Whether foreign exchange market and stock market can concertedly operate will have impact on the whole financial market development and national economy.In some situations, the interaction between stock market and foreign exchange market could turn into a financial crisis such as the 1997 Asian financial crisis and the U.S. financial crisis in 2008.By analyzing the correlation between them, we can put forward the corresponding countermeasure, applying to improve the linkage mechanism of currency and stock market for China’s monetary authorities, so as to reduce the damage that come from risk transfer to China’s financial markets and maintain the steady development of economy. Numerous domestic and international scholars have studied the relationship between stock market and foreign exchange market, but most scholars only focus on the linear form of their price spillovers without taking into account the economic background. Few scholars focus on the nonlinear relationship between them.Therefore, this paper empirically analyzes dynamic relationship between the foreign exchange market and stock market based on the form of nonlinear.This paper study joint dynamics of stock and foreign exchange markets from two aspects namely price spillover and volatility spillover. This paper use Renminbi against the dollar and the Shanghai composite index to study the Chinese stock market and stock market and the sample period ranges from July 22,2005 to June 10,2014 Firstly,this paper introduce the two classical theory model that is the flow-oriented model and the stock-oriented model and then systematically elaborate that how stock price and exchange rate interact with each other and how the transmission mechanism between them operates.Then this paper study on the price spillovers applying structure break cointegration test to verify the nonlinear relationship exists between exchange rate and stock price. According to the structure breakpoint (January 31,2008) separate the sample into two stages.Because of the existence of nonlinear relationship between exchange rate and stock price, this paper applies nonlinear granger causality test to investigate the causality relationship between exchange rate and stock price and give economic interpretation.On the basis of research on the price spillovers, this paper study volatility spillover effects in different stages through the MGARCH-BEKK model.In the analysis of the RMB exchange rate against the dollar and the Shanghai composite index in different stages, the results show that:exchange rate is negatively related to the stock price, but in the aftermath of the crisis the two variables are positively correlated.Before the financial crisis there is no causal relationship between exchange rate and stock price, and in the wake of the financial crisis there exists bidirectional causality between them. The financial crisis also has an impact on volatility spillover effect between stock prices and the RMB exchange rate. There exists bidirectional volatility spillover between stock price and exchange rate before the financial crisis, while there exist no volatility spillover during the financial crisis. During the post financial crisis period there exists bidirectional volatility spillover between stock price and exchange rate. Based on empirical analysis, this paper analyses the problems of China’s stock market and foreign exchange market and gives policy suggestions respectively.