Estimation on Dynamic Correlations Among Foreign Reserve Growing, Liquidity Shock and Stock Market Fluctuation in China

Abstract

Since 1995, China's foreign exchange reserve has been growing rapidly, which brought about liquidity problem significantly and stock market volatility sharply. This paper explores both long-term and short-term dynamic effects on China's stock market by changes in China's foreign exchange reserve. Based on a VEC model, empirical results show that, growth of foreign exchange reserve exacerbated stock market volatility. But in the short term, changes in foreign exchange reserve have a reverse effect on stock market, which is great opposite to that situation in the long term.