Abstract
This study investigates the impact of hot money on stock and exchange rate markets and the returns and volatility spillover between the stock and exchange rate market in China by using the monthly data covering the period from July 2005 to June 2013. This paper also uses the quantile approach to determine whether the hot money influences the stock and exchange rate markets. The results first reveal the long-run equilibrium relationship that is exhibited between the stock and exchange rate market. Second, hot money has an impact on the stock market but has no effect on the exchange rate market, according to the VECM-BEKK model. Third, regarding the volatility spillover effects on the stock and exchange rate markets, there is a spillover effect on the Shanghai stock and exchange rate markets. Hot money has an impact on the stock and exchange rate markets. Finally, we apply the quantile regression to determine the impact of hot money on low quantiles of the exchange rate and high quantiles of the Shanghai and Shenzhen stock market.
Highlights
As the financial markets have become liberalised and international, the relationship between the stock market and the exchange rate market has become a popular issue for the economic literature to investigate and discuss
This paper investigates the impact on the stock and exchange rate markets as hot money flows into the Chinese market
This study further examines the influence of hot money on the stock and exchange rate market after China implemented financial liberalisation in 2005
Summary
As the financial markets have become liberalised and international, the relationship between the stock market and the exchange rate market has become a popular issue for the economic literature to investigate and discuss. The analysis of the relationship between the stock market and the exchange rate market is more interesting and important in emerging markets such as the Chinese market. The Chinese government implemented the fixed peg exchange rate policy before 2005. As the financial markets were liberalised, the Chinese government released the exchange rate policy reform in July 2005, abolishing the fixed nominal exchange rate system for the U.S dollar. Foreign governments had pressured the Chinese government to make their exchange rate more flexible and floating. The Chinese government shifted their system to a version of a currency basket system
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