The Relationship between the Gold Price, Crude Oil Price, Exchange Rate and Chinese Stock Market Indexes

Abstract

One of the trickiest problems for investors is how the financial and commodity markets interact with each other. The volatility in one market might affect the price of the other market. This essay aims to clarify the relationship between gold, crude oil, exchange rates, and Chinese stock market indices. In order to do this, the Shanghai Stock Exchange Index and the China Industrial Index, two indices that reflect the Chinese financial market, were subjected to the DCC-GARCH model (Generalized Autoregressive Conditional Heteroskedasticity Model). By capturing the dynamic correlations of the time series' variance, covariance, and correlation coefficient, this model aids in illuminating the long-run dynamic correlation between returns. The findings show that gold and crude oil are positively correlated with both the Shanghai Stock Exchange Index and the China Industrial Index, while the correlations between the USD CNY exchange rate and the two Chinese stock indices are negatively correlated, using monthly data from 2000-01-03 to 2022-08-30. This paper shows that stock prices in China are weakly linked to international commodity markets and exchange rate with the US. Additionally, throughout the observation period, financial crisis (2008) and the COVID-19 pandemic breakout (2020) enhanced comovement between the Chinese stock market, commodities, and exchange rate in general.