The Analysis Of Influence From Monetary Policy To The Liquidity Of The Stock Market

With the20years development of our stock market, it has become an integral part of our national economy. Liquidity, as an important attribute of stock market, Amihud(1986) even see it as the base of the market, has been valued by government and investors. In the other hand, monetary policy which is the most important weapon to regulate the economy and financial market, however, researchers haven’t reach an agreement about the relationship between these two factors.The purpose of this paper is to analyze whether monetary policy can influence the liquidity of stock market and how from both macroscopic perspective and microscopic perspective, and can give some advices to the government and investors base on the research. This paper selects the growth rate of monetary base and overnight rate as the proxy variables of monetary policy. And since the liquidity of the stock market is a comprehensive variable, this paper chooses seven proxy variables from three aspects which are market activity, price impact and transaction cost to represent the liquidity of stock market. In the macroscopic perspective, this paper builds VAR model and analyze the relationship through Granger Causality Test, Pulse Response Analysis and Variance Decomposition. The result is an easy monetary policy can improve the liquidity of the stock market and also a tight monetary policy can result in an opposite influence. However the result is not statistically significant, which means the influence of monetary policy to stock market is weakened. So this paper also gives some explanations about this phenomenon. In the microscopic perspective, this paper use panel data and introduce two new variables to build dynamic panel data model. Through the research, this paper finds four phenomenons. First, the influence of monetary policy is related to the market value of certain stock, specifically, the higher the market value, the weaker the influence. Second, this paper also finds an easy monetary policy can improve the liquidity and a tight monetary policy does the opposite. Besides, this paper finds the market value and yield rate of certain stock also has positive influence in liquidity. Since China’s stock market is an emerging market, the research mainly focuses on liquidity risk and liquidity premium, few of the paper involve the relationship between monetary policy and market liquidity, especially from the microscopic perspective, this paper somewhat cover the shortage. Furthermore, this paper can help us to know the market microstructure better, support the government to formulate monetary policy and give some advices to the investors.