The Effect Of RMB Exchange Rate Fluctuation On The Stock Price Index

After the RMB exchange rate formation mechanism reform in 2005,the elasticity of exchange rate volatility increased,foreign exchange investors have greater autonomy,the price formation mechanism is more perfect,the impact of the RMB exchange rate on China's capital market is also increasing.Of particular note is that in recent years,China's economic environment is undergoing great changes,the reform of the exchange rate regime,capital account liberalization,and interest rate marketization propulsion,which means that the openness of China's economy is gradually increasing,our domestic and international markets will be more closely linked,the exchange rate and the price of the stock price as the linkages between domestic and foreign markets,the relationship between the two variables become a topic of interest to scholars from various countries.Foreign scholars study the relationship between the two started earlier,and most of them are in developed countries,it is because the economic environment is more relaxed in developed countries,and the exchange rate regime is more flexible,the background can basically coincide with the traditional theoretical model.But China's exchange rate reform and non-tradable shares reform began in 2005,before that fewer scholars study the relationship between two variables,after the reform research began gradually increased,but you need to pay attention to different time and different economic environment,from the literature you can see the conclusions are inconsistent,which may be of different economic backgrounds or methods generated,and therefore needs to be more in-depth study.Understand the short and long term impact of exchange rate fluctuations on the stock price,and grasp the short and long term impact of exchange rate fluctuations on the stock market in different industry sectors will help investors to form the correct investment decisions,help the monetary authorities to develop a reasonable financial policy in order to achieve the stability of the financial markets and the real economy.This paper elaborated the impact of exchange rate on stock price according to the two classical theories of exchange rate and stock price,combined with five transduction pathway of the balance of trade,international capital flow,interest rate,money supply and the psychological expectations.In authentic proof,currently few domestic literature study on multi variable model based on global macro economy when study on the relationship between exchange rate and stock price.Most of them select exchange rate and stock index or join interest rate or international short term capital.Through constructing the six variable VECM model of Shanghai Composite Index,the RMB exchange rate,trade balance,foreign direct investment,interest rate,money supply to test the short and long term relationship between exchange rate and stock index,the empirical results show that RMB exchange rate(direct quotation)and the Shanghai Composite Index has a long-term equilibrium relationship,and a negative correlation between the two,that revaluation will lead to rising stock prices,on the other hand,devaluation of the RMB will cause the decline in stock prices.In the short term relationship between RMB exchange rate and the Shanghai Composite Index was inconsistency with long-term equilibrium,there has been a positive correlation between the two,the appreciation of the RMB will cause the decline in stock prices;the other hand,the devaluation was able to drive stock prices.Fluctuations in the Shanghai Composite Index series is mainly attributable to the impact of its own,but the contribution of exchange rate is also larger and showed a gradual increasing trend.In view of the difference of the exchange rate to different stock market sectors,this paper takes SW industry classification as representative,pick eight industry index of real estate,textiles,chemicals,transportation,household appliances,telecommunications,banking and pharmaceutical biotechnology,correlation analyses with the exchange rate,and thereby further analyses the impact of exchange rate on stock price at the microscopic level.The conclusion is that the effects of exchange rate fluctuations on the industry sector is different between long-term and short-term and there are also differences between the various sectors.In the long-term,the textiles,household appliances and pharmaceutical biotechnology industry sector showed a positive change of RMB exchange rate,real estate,chemicals,transportation,telecommunications,and banking industry sector showed a negative change of RMB exchange rate,but in the short-term,the RMB exchange rate fluctuations have a negative impact on telecommunications and pharmaceutical biotechnology industry sector,the rest of the sectors have a positive impact,and the plate reaction rate different,in which chemicals,household appliances,banking and pharmaceutical biotechnology sector exist a lag effect,the real estate industry sector,transportation and telecommunications industry sector have a larger fluctuations affected by the RMB exchange rate,and the household appliances and the banking industry sector less affected by exchange rate fluctuations.Finally,proposals are presented to the government as follows,to do the exchange rate reform,interest rate liberalization,capital account liberalization reform,and promote the healthy development of the stock market by improving the prices formation mechanism of the stock market and the structure of China's stock market investors.Investors and monetary authorities need to take full account of the exchange rate of the RMB exchange rate on the conduction of the industry sector to develop appropriate investment decisions and financial policies to promote the steady development of China's exchange rate market and the stock market.