Research On The Time-varying Effects Of China-United States Interest Rate Spreads And Exchange Rate Expectations On Asset Prices

As China's capital markets and international capital markets become more and more connected,the relative changes in domestic and foreign interest rates and changes in exchange rate expectations will effecton the relative expected return rates of domestic and foreign investors on China's financial assets,thus changing the domestic and foreign investors' Assets allocation structure and the supply and demand of assets,which finally will impact on China's asset prices.Under the background of an open economy,asset prices in our country are facing the dynamic influence of domestic monetary policy and changes in the international financial environment.Therefore,it is particularly important to describe the relationship between interest rate spreads,exchange rate expectations and asset prices effectively.This paper analyzes the mechanism of interest rate spreads between China and the United States and the expectation of the exchange rate on China's asset prices by building a two-country model,combined with the theory of no-interest-rate parity,the equilibrium theory of the monetary market and the equilibrium theory of the stock market.This paper empirically analyzes the time varying effects of Interest Rate spreads between China and the United States,exchange rate expectations on asset prices based on the TVP-SV-VAR model with data ranges from 2006 to 2016.The results of the study show that: Firstly,China-United States interest rate spreads and exchange rate expectations have a significant impact on China's asset prices.The rise in interest rate spread has inhibited both of the China's stock prices and house prices,which presents even stronger when the liquidity situation of market has been tightened.Furthermore,the devaluation of the RMB is expected to have an inhibitory effect on China's stock prices,while it has a significant role in promoting China's housing prices.Secondly,in the context of different economic background,the responses of interest rate spreads and exchange rate expectations were different on China's asset prices.The time-varying characteristics show differences of influence both in the direction and degree.The government should make decisions based on specific macroeconomic background and be cautious about intervention policies.Thirdly,judging from the speed and effectiveness of information transmission,the transmission speed of China-United States interest rate spreads and exchange rate expectations for stock prices is significantly faster than the transmission speed for house prices.Based on the conclusions,the following suggestions for policy makers are proposed: The government's regulation of China's asset prices should be based on the specific economic development background and the time-varying differences should be taken into the consideration.Under the background of China's ongoing exploration of the market-oriented reform of exchange rates and interest rates,it is of great significance for regulatory authorities to strengthen the effective management of the RMB exchange rate expectations and establish a scientific interest rate adjustment mechanism to stabilize China's asset prices and promote economic development.