The Research On The Effect Of Monetary Policy On Stock Price Fluctuation In China

Nowadays, the stock market in China is experiencing a steady and healthy development and structural reform. Meanwhile, it plays an important role in providing financing channels, allocating resources rationally and promoting economic development. But short-term fluctuations and wild swings in China’s stock market prices present a growing trend after the financial crisis, so the impact and therisk cannot be ignored. In 2015, A-share stock market price experienced "roller coaster" type of development, with thousand shares limiting up and thousand shares limiting down. In the first half of the year, the Shanghai Composite Index has risen to 5178 points under the influence of a series of good news, but it fell to 2850 points after the mad cow, which is such a non rational, non normal excessive volatility, worthing us exploring the reasons and the countermeasures through the phenomenon. Monetary policy is not only a most powerful tool to achieve economic growth and regulate macroeconomic in many countries, but also one of the most important factors affecting the stock price. In the complex economic situation at home and abroad, therefore, we need clarify the effect and its mechanism of monetary policy on stock prices in China to improve the central bank`s monetary policy conduction efficiency and promote the healthy development of the capital market.In this article, we will expand the structural VAR model, break the linear analysis paradigm, allow the parameters to change with time during the observation period, and use the time-varying parameter vector autoregressive model, namely the TVP-VAR model, which maximumly captures the time-varying relationship and characteristics among the money supply, interest rate and stock price. We select broad money M2 year-on-year growth rate, the actual bank 7-day interbank weighted average interest rate and Shanghai composite index closing price at the end of month year-on-year growth rate as specific variables basing on the 180 monthly data from January 2000 and December 2014. Firstly, we need carry stationary test for all the variables and Markov chain Monte Carlo(MCMC) simulation. Then Matlab software respectively analyzes impulse responses of the stock price to M2 shock and 7-day interbank weighted average interest rate shock. Finally, we will get dynamic effect of monetary policy shocks on stock price volatility, checking if there exist structural changes in this effect.Unlike previous linear researches, this paper gets the following conclusion: China’s money supply has a significant positive effect on stock price volatility, especially more prominent in bull market, which may be related to investor expectations, monetary policy measures and other factors. The influence mechanism of interest rate on the stock price is not clear, leaded by many factors, including unfinished interest rate liberalization, the stock market segmentation and immature psychology and technology of investors.According to the research in this paper, suggestions are proposed as follows. First, it is necessary to accelerate the process of developing and perfecting the capital markets. Besides, the coordinated development of monetary market and capital market should be promoted. What’s more, we need further improve the degree of marketization of interest rate in our country by gradually easing rate control, to provide more favourable operating condition for capital market.