The relationship between exchange rate and stock prices—An empirical study since the exchange rate system reform of China

Abstract

The paper use the analysis method of time series, including stationarity test, cointegration test and Granger causality test. Focus on the relationship between RMB exchange rate against the U.S. dollar through the Shanghai Composite Index and Shenzhen Component Index and finally heteroscedasticity test after establishment the first-order error correction model. Founding through modeling analysis, in Shanghai and Shenzhen stock markets, RMB against the U.S. dollar and stock prices have a long-term cointegration relationship, the long-run elasticity is positive. Stock index on short-term flexibility of the RMB against the U.S. dollar is negative, but this flexibility is very small for the long-run elasticities. The model can not only estimate the stock index and the exchange rate between the short-term and long-term flexibility simply, but also have some reference value for the policy-making which can stable foreign exchange market and stock market.