The Response Of China Stock Markets To The Unexpected U.S. Monetary Policy:an Empirical Study

If one country changes it's monetary policy,it will not only affects the domestic economic including the produce, inflation and employment, but also affects other countries' economic through interest rate, exchange rate, asset price and other variety of channels. Considering this point, this paper studies the spillover effects of China's stock market to the U.S. monetary policy. According to the rational expectations theory of Jhon·M Mth and a number of empirical analysis results, only the unexpected U.S. monetary policy adjustment will have a spillover effect on asset prices, and the expected monetary policy adjustment will not affect the asset prices. So the decomposition of monetary policy become the primary task of this paper, based on the decomposition method of Kuttner(2001), we calculate the unexpected monetary policy and expected monetary policy. Then we select the unexpected monetary policy and the expected monetary policy calculated before as the explanatory variable, the empirical results show that only the unexpected monetary policy will have spillover effects on China's stock market, if the unexpected part of federal funds rate raised by 25 basis points, the Shanghai stock index yield will increase 0.65%. However the total part and the expected part of federal funds rate change will not affect China's stock market. Then we add the asymmetric virtual variables in the model, and we find that spillover effects of positive unexpected monetary policy and negative unexpected monetary policy does not exist differences. This paper also has selected stock index of different industry as explained variable, and the empirical results show that the U.S. monetary policy have a greater impact on the downstream industry than the upstream industry.We also find that the auto industry is affected by U.S. unexpected monetary policy more than other industries and the unexpected monetary policy almost has no influence on the extractive industry. Finally, this paper finds that the spillover effects of U.S. monetary policy has a time-varying effect, and the U.S. monetary policy has negative impact on China's stock market before 2000,but the shock became positive gradually after 2000. And the spillover effects of U.S. monetary policy have greater negative fluctuations during the south-east Asian financial crisis of 1997 and the global financial crisis of 2008.