Research On The Dynamic Relationship Between The Stock Market And Foreign Exchange Market

With the increasing development of economic globalization and financialliberalization, the rapid development of the international financial market makes theeconomic development of all countries tend to be integrated gradually. Especially, theties between the stock market and the foreign exchange market of all countries areincreasingly close. While international capital flows to some extent contribute to thecrisis of financial market, which may even become serious global financial crisis.Multiple financial crises occurred since the1990s, including the crisis of Japan’sbubble economy, the economic crisis of the Southeast Asian countries and USsubprime lending crisis, etc. In this case, it seems quite necessary to explore therelevance of price fluctuations between stock market and foreign exchange market ofall countries. As the prices of above two financial markets, exchange rate and stockprice are considered as important indexes that reflect the strength of the nationaleconomy. There is a certain inherent correlation between them. According to empiricalresearches from international scholars about the relevance for stock market andforeign exchange market. The empirical results still had no consistent conclusion.Most of the findings show that, there may be a two-way or a one-way, forward orreverse relationship. And it was mainly caused by the differentiation of social andeconomic environment, research methods and index selection. Particularly, how todescribe the dynamic correlation characteristics of the stock market and foreignexchange market and the system of information conduction under financial crisis hasbeen a focus of research for scholars, as well as rational macro adjustment fromnational regulators.In order to further analyze the interaction relationship between stock price andexchange rate, on the basis of analyzing domestic and foreign researches, this paperwill analyze the characteristics of dynamic correlation between stock market andforeign exchange rate, by adopting the combination of qualitative and quantitativeanalysis of research methods. And it includes five parts: firstly, The introduction,mainly elaborated the research background and significance of topics, for the theoryof literature both at home and abroad, and explain the main research methods andresearch ideas and innovations and shortcomings; secondly, theoretical basis ofcorrelation between stock market and foreign exchange market, including relatedtheory and the analysis of the transmission path between the two markets; fourthly, byusing the sample data, the empirical analysis sample countries dynamic relationshipbetween stock markets and foreign exchange market; at last, respectively from the Angle of the international financial market and the domestic capital market, to preventthe financial crisis impact on the stock market the linkage of the currency financialregulatory Suggestions are put forward.In this paper, the empirical analysis of the selection of E-G two-step cointegrationtest and VAR model Granger causality test of hypothesis, helps to do empirical test ofthe stock market and whether there is a long-term equilibrium relationship betweenthe foreign exchange market, and whether there is a leading relationship to each other.At the same time it focus on the difference between the dynamic characteristics of therelationship between stock price and exchange rate. Finally on the basis of previousanalysis, this paper respectively put forward the corresponding policyrecommendations to the international financial market and construction of China’sforeign exchange market and stock market.The main conclusions gained are as follows: Firstly, there is no evidence shows theconsistency of the volatility in the stock market and the volatility in theforeign-exchange market. Secondly, there exists bidirectional causality for the stockmarket and the foreign-exchange market in Japan. Thirdly, the2008financial crisisindeed affected causal relationship between stock price and exchange rate in emergingmarket countries. In contrast, the developed countries only in long-term relationshipsexist such a causal relationship. Compared with the developed countries, developingcountries of is more significant in the relationship between stock market and foreignexchange market. Especially in China’s stock market volatility and correlation ofcurrency fluctuations and causation are becoming ever more obvious, but that on theone hand, still need further research in the future.