Money Supply, The Impact Of Environment On The Stock Price Mechanism

This paper suggests conceptual statements "money supply environment" as "the currency factor which influences the supply and demand of funds in the stock market", trying to answer "through which mechanism the money supply environment will affect stock prices" and "what the real influences these mechanisms have in China".This study follows the following approaches: first, comb the theoretical basis and research literatures about the relationship between money supply environment and stock prices; second, analyze the determination mechanism of the stock price from supply and demand theory, put forward my own demand and supply functions of stock and price determination mechanism, and suggest that the determinants of the stock supply and demand are mainly the wealth level of investor, the prospective return of the stock, return of alternative assets, investors'preferences, and take the above as the analysis framework; third, conduct theoretical analysis and empirical examination about the influencing mechanism of the money supply environment on stock prices from different aspects, including real economy, money supply, interest rate, inflation, deviation of money supply, credit, reservation, anticipation.The money supply environment can affect stock prices through the following mechanisms: Mechanism of the real economy: money supply environment can positively impact the real economy growth, which in turn can positively impact affect stock prices through such mechanisms as prospective return of the stock, wealth level of investor and reaction mechanisms on money supply environment. Empirical examinations find that there is "deviation phenomenon of stock and economy" in China, which means that mechanism of the money supply environment through which real economic impacts of the stock price does not run smoothly.Money supply mechanism: money supply can affect the stock prices through its changes, besides, can affect the stock prices through changes of intermediary variables such as interest rates and inflation. The money supply itself can positively impact stock prices through portfolio effect and anticipation effect; changes in interest rate can respectively generate impacts of different directions through prospective yield effect, substitution effect, cumulative effect, financing cost effect and anticipation effect; inflation can generate impacts of different directions through prospective yield effect, substitution effect and anticipation effect; deviation of money supply can positively impact stock prices. Empirical examinations find that money supply in our country positively influences the stock price significantly, there is also portfolio effect, but the deviation of money supply had no significant effect on stock prices.Credit mechanisms: bank credit as one of the sources of money creation, its impact on stock prices is through the money supply. Empirical examinations find that China's loans and stock prices bear strong correlation; the relationship between short-term loans and stock prices is more significant than that of long-term loans.Reservation mechanism: taking changes in money supply environment such as real interest rate as initial variable, after being shocked, reservation can negatively impact stock prices through the portfolio effect and cumulative effect. Empirical examinations find that savings of Chinese residents can negatively influence stock prices, while the savings rate can positively stock prices.Psychological anticipation mechanism: changes in money supply environment can influence psychological anticipation of investors'through the anchoring effect, the story effect, and non-rational cognitive bias such as representative heuristic bias, resulting in noise trading or herding behavior, and further impact stock prices.This paper also examines the relative influences of the above mechanisms on China's stock prices by time period: from 1998 to 2001, the influence of the deposit interest rate mechanism, the narrow money supply M1 mechanism is significant; from the second half of 2001 to the end of 2005, the influence of each mechanism is very small; from 2006 to the end of 2009, the influence of credit mechanism, portfolio effect and psychological mechanism is significant.