Analysis of the Linkage between China's Exchange Rate and Stock Price Index - Based on Wavelet Analysis

Abstract

This study is based on the correlation between China's exchange rate and Shanghai A-share stock price index, and explores its leading backward relationship. The research period is from October 1996 to December 2016. We use wavelet analysis as the research method. Empirical studies show that there is a significant correlation between China's exchange rate and the Shanghai A-share stock price index. Except for the correlation between 2000-2004 before the exchange rate was loosened, there was a significant linkage in the later period.In the high-frequency (short-term 1-4 years), China's short-term exchange rate has a constant positive correlation with the Shanghai A-share stock price index. In the low frequency (long-term 4-8 years), after we added the control variables( interest rate), the lead-lag relationship between the exchange rate and the Shanghai A-share stock price index was affected by the 2008 financial crisis, and the structural change of the stock market did affect its leading-back relationship. JEL classification: F31, G01, G12