Dynamic Relations Among Interest Rate,Stock Price And Exchange Rate

The financial crisis sweeping the world in 2008 has made the world financial system suffer tremendous impact.The spillover effect between macroeconomic indicators plays an important role in the promotion of the financial crisis.Interest rate,stock price and exchange rate are the most representative financial variables in three important financial sub-markets: money market,capital market and foreign exchange market,respectively.The interaction among the three variables has gradually attracted more and more attention from scholars and researchers.In December 2016,the Central Economic Working Conference made it clear that “prevention and control of financial risks should be placed in a more important position”.In order to prevent the outbreak of systemic risks,local governments should assess the financial system risks from the perspective of the interrelationship among economic activities,financial markets and financial institutions' behavior.Therefore,based on the dynamic relationship among interest rate,stock price and exchange rate fluctuation,revealing the linkage among money market,capital market and foreign exchange market is significant for further development of China's economic.Based on the background and significance of the research,this paper summarizes and summarizes the relevant research at home and abroad,identifies the existing theories on interest rate and stock price,interest rate and exchange rate,exchange rate and stock price,and introduces the wavelet model used in the research in detail.Wavelet model can study the dynamic characteristics of variables in time dimension and frequency dimension at the same time,so as to more accurately characterize the linkage between variables.The wavelet model can simultaneously study the dynamic characteristics of variables in time dimension and frequency dimension,and has the advantages of high frequency resolution and good time aggregation.It can explain the causal relationship between variables and more accurately characterize the linkage between variables.It is widely used in correlation and causality analysis between time series.In this paper,we use the continuous wavelet,cross wavelet,wavelet coherence and phase difference in the wavelet model to study the dynamic relationship between variables.Compared with the previous nonlinear research on interest rate,stock price and exchange rate,the wavelet model divides the frequency domain dimension more carefully.Perfected the one-sided conclusion of using only high frequency or low frequency data.In the empirical part,the weighted average of the 7-day interbank offered rate(Shibor),the Shanghai Composite Index and the US dollar against the RMB exchange rate are selected as the surrogate indicators for interest rates,stock prices and exchange rates,respectively.Firstly,based on the monthly interest rate,stock price and exchange rate data from January 2006 to December 2018,we analysis the time series characteristics of each financial variable are analyzed,and test the stationarity of three variables.Secondly,through continuous wavelet transform,cross-wavelet transform and coherent wavelet transform,we describe the fluctuation characteristics of a single variable and the characteristics of fluctuation period changing with time.Also,this paper describes how the correlations,between interest rate and stock price,interest rate and exchange rate,exchange rate and stock price,change over time and the correlation strength of different periods in each fluctuation period is given.The phase difference is added into the cross spectrum and the coherent wavelet spectrum in the form of arrows to describe the causal relationship and correlation direction between variables,and determine the transmission mechanism,direction and time lag of the linkage effect between financial markets.The empirical results show that:Firstly,in short-term fluctuations,interest rates and stock prices,interest rates and exchange rates,exchange rates and stock prices are interaction at different time points.Secondly,in the medium-term and medium and long-term fluctuations,interest rates and stock prices,interest rates and exchange rates are still interaction at different time points,but stock prices movements are lagging to the exchange rates fluctuations.Thirdly,in the long-term fluctuations of 16-32 months and 32-64 months,the relationship between financial variables is clearer,and the internal linkage among the three variables is clearer.In long-term and ultra-long-term fluctuations,interest rate movements are leading to the stock price fluctuations,and the conduction time of both is 1/4 cycle in long-term fluctuations.Exchange rates fluctuations are leading to the interest rate movements,and when RMB appreciates,interest rate rises.There is neither causality nor correlation between exchange rate and stock price in the long cycle.According to the conclusions drawn from the empirical test,this paper puts forward the following suggestions: Firstly,a correct understanding of the linkage effect among variables at different scales will help the effective implementation of China's policies.Secondly,China should continue to deepen the degree of interest rate marketization,speed up the progress of interest rate marketization,improve the stock market system,improve the financial market system and strengthen the correlation between the money market and the stock market.Also expanding the trading subjects and innovating the trading tools in the monetary market.Thirdly,retail investors should properly enrich their basic financial knowledge,pay close attention to China's economic policy through newspapers,make rational investment and avoid emotional investment.Fourth,China should improve the supervision of financial markets,prevent or mitigate risk contagion between them,and improve the corresponding regulatory mechanism.