Abstract
The reform of the exchange rate system has brought epoch-making changes to China’s capital market. Based on the monthly exchange rate of the US dollar against RMB exchange rate and the Shanghai Composite Index (SHCI) from June 2005 to August 2017, this paper empirically tests the dynamic relationship between China’s exchange rate and stock price using the GARCH-in-Mean model. The empirical results show that China’s stock market doesn’t have a high level of openness to foreign investment; there is a two-way influence mechanism between China’s stock price and exchange rate market, and the appreciation of RMB will bring the stock market down; from the perspective of market fluctuations, the uncertainty of the exchange rate will not have an effect on the trend of the stock market, and the risk transmission mechanism between the two markets is not significant.
Highlights
On August 11th, 2015, the People’s Bank of China announced the launch of a new round of exchange rate reform to adjust the quotation mechanism of RMB against the US dollar exchange rate
In order to investigate the correlation between the exchange rate market and the stock market since the implementation of the exchange reform, this paper tests the generalized autoregressive conditional heteroskedasticity (GARCH)-in-Mean model of the Shanghai Composite Index and the exchange rate yield series from June 2005 to August 2017
The empirical results show that: First, there is a two-way influence mechanism between China’s stock price and exchange rate market, and there is a positive correlation in the long-term
Summary
On August 11th, 2015, the People’s Bank of China announced the launch of a new round of exchange rate reform to adjust the quotation mechanism of RMB against the US dollar exchange rate. Since this round of exchange has been changed for three years. In order to prevent external shocks from causing domestic financial market turmoil through the foreign exchange market, it is necessary to clarify the dynamic transmission relationship between exchange rate and domestic financial asset prices, and study and design corresponding response mechanisms. The rest of the paper is structured as follows: the second part is the literature review and possible innovations in this paper; the third part is the design of the model; the fourth part is the data selection and its descriptive statistical analysis; the fifth part is the empirical result analysis; The final section shows the main conclusions and policy recommendations
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