Returns and Volatility in Chinese and U.S. Stock Markets in Uncertain Markets: Evidence from Fed’s Monetary Policy

Abstract

The Federal Reserve announced a 75-basis point rate hike to raise the benchmark rate to a range of 2.25%-2.50% to curb another spike in inflation on July 28. Since 2022, the Fed has announced four rate hikes, with the cumulative increase reaching 150 basis points in June-July alone, the largest since Volcker took the helm of the Fed in the early 1980s, which might be reflected in the volatility of stock prices in China and the U.S. market. This paper assesses the impact of fed rate hikes on the Chinese A-share market, specifically the Shanghai Stock Exchange (SSEC) and Standard and Poor's 500 (S&P 500), a stock market index that reflects the U.S. stock market. A VAR model and an ARMA-GARCH model were established to analyze the variations in stock prices caused by changes in foreign exchange rate between CNY (China Yuan) and USD (US dollars). As a result, this paper asserts that a more elevated exchange rate has a relatively negative net effect on the Chinese stock market and a negligible influence on the U.S. stock market.