Research On Dynamic Spillover Effect Between RMB Exchange Rate And Stock Market Based On Structural Breaks

With the frequent fluctuations of the RMB exchange rate and the increase of the width and thickness of China’s stock market,the relationship between them is becoming stronger and stronger,and its dynamic spillover effect has affected the stable development of China’s financial market.Under the high-frequency transmission of capital flow and information,the spillover effect of the rapid spread of price changes and ranges from one market to another is characterized by diversification,coordination,stage,lag and so on.Different from the subprime mortgage crisis in 2008,the changes in political relations such as the Sino-US trade war in 2018 will not only have a great impact on the RMB exchange rate but also affect the asset value of China’s financial market and the trend of the stock market.Therefore,under the situation that the dynamic spillover effect between China’s financial markets is becoming stronger,it is necessary to specifically study the characteristics and structural change location of the spillover effect,and analyze which domestic and foreign influencing factors will lead to the structural break and characteristic change.Further guarding against and avoiding the systemic risk of the financial market are conducive to the stable development of China’s economy.Structural break refers to a sudden and significant change at an unknown point in time,which is universal in various disciplines.Although the probability of occurrence is not high,a series of follow-up effects are extensive and deep.The financial crisis,the trade war,Brexit and the outbreak of the epidemic are all typical examples of such events.Major events in the financial field,such as "black swans" and "gray rhinos",will cause structural changes within the time series data,not just faults and jump extremes.Based on the sudden change of structure,this dissertation studies the dynamic spillover effects of the RMB exchange rate and the stock market from three aspects.Firstly,analyze whether there is a structural change in the time-varying trend of mean spillover and volatility spillover,get the position of structural change by searching the conditional correlation coefficient,and analyze which major economic events affect it.The structural change segmentation is carried out by the endogenous of the data itself,to avoid the subjectivity of artificial segmentation and the "pseudo regression" of financial time series.By analyzing a series of dynamic spillover processes before,during and after the sudden change,we can know more effectively that macro or micro factors will affect the structural change of the exchange rate market and the stock market.Secondly,it analyzes the information spillover effect,that is,the combination of mean spillover effect and volatility spillover,which comprehensively reflects the different meanings of returns and risks in the financial market.The information spillover index based on variance decomposition systematically measures the direction,intensity,and memory of the spillover effects of returns and volatility.Finally,based on the problem,this dissertation studies the transmission path and main influencing factors of the spillover effect between the RMB exchange rate and the stock market deepens the cognition that the negative spillover effect contains the risk of cross-superimposed infection,and puts forward relevant policy recommendations.This dissertation particularly focuses on the structural change of the dynamic spillover effect between the foreign exchange and the stock market,which may change the roles of the spillover and receiver of the spillover effect between the market.When dealing with sudden financial events and financial tail risks,we hope that the regulatory authorities can better grasp the changes in the market caused by structural changes and avoid inducing systemic risks.The main contents and conclusions of the article are as follows:First,analyze the transmission path and structural change factors of the spillover effect between the RMB exchange rate and the stock market.This dissertation summarizes the characteristics of dynamic spillover effect from the law of financial time series data,and further reveals the formation mechanism of RMB exchange rate and stock market.The economic theory of the relationship between RMB and stock market includes flow-oriented model,stock-oriented model and Gordon model,based on which four main transmission channels are obtained.specifically: foreign trade import and export enterprises(Sino-US trade war),international capital flows(net inflow of foreign capital),psychological expectation(deepening the openness of the capital market)and money supply(the share of foreign exchange decreases).The analysis shows that the different effects of the spillover effects may be caused by the spillover effects under the current complex domestic and foreign background,and the structural break factors will be caused by the spillover effects under the new normal in China.Among them,the inflow and outflow of crossborder funds in the stock market will lead to mutual guidance to the foreign exchange market,but with different time lag effects.In addition,the positive effect of RMB exchange rate on investors’ expectations is greater than the negative mood,mainly through the improvement of the overall prosperity prediction at the macroeconomic level.The third chapter analyzes the current situation of RMB exchange rate and stock market from four transmission paths,which provides theoretical and practical demonstration for the construction of RMB exchange rate and stock market empirical model.Second,construct a time-varying t-Copula and Bai-Perron structural change test to study the mean spillover effect.The partial t distribution of GJR is selected to fit the RMB exchange rate and the logarithmic rate of return of the stock market to estimate the edge parameters.After the fitted residual has passed the KS test,the conditional correlation coefficient between them is obtained by constructing a time-varying t-Copula model.The dynamic parameters α and β are significant at a 5% confidence level.Copula model can accurately measure the tail dependence of financial time series,including aggregation,asymmetry,persistence and so on.The step size of the maximum number mcm 5 and ε= 0.05 is set to search for the average structural change point,and two structural change points are obtained at the significance level of 1%.The position of the change point occurs on June 20,2018,and the net mean change is more than 0.2;a new point is added at the significance level of 10%,and the location is on May 15,2018.Based on the analysis of the positions of the three structural change points,it is concluded that the Sino-US trade war is the main factor affecting the abrupt change of RMB exchange rate and stock market return structure,and it has a great impact on both RMB exchange rate and the stock market,resulting in a double superposition spillover effect.Third,construct DCC-GARCH and modified ICSS structure change test to study the volatility spillover effect.The t-distribution of DCC-GARCH(1)is selected to fit the volatility of the RMB exchange rate and the stock market to get the dynamic conditional correlation coefficient between them,which satisfies the assumption that α + β is less than 1,and is significant at 1% confidence level.Among them,the Shanghai and Shenzhen stock index are closest to DCC α + β of the Hang Seng Index,which is easily affected by historical fluctuations and market changes and has persistence.Six groups of data are formed by pairwise groups of four indices to test the change of variance structure.The modified ICSS algorithm overcomes the assumption that variance is stable and avoids the sample distortion caused by the "peak and thick tail" of financial time series and the aggregation of fluctuations.The empirical results show that there are two structural change points in the dynamic correlation coefficient between offshore RMB and CSI300 index,and the sample time period is divided into three sub-intervals: from May 5,2014,to March 25,2015,from March 26,2015,to September 11,2015,and from September 14,2015,to December 31,2019.From March to September 2015,the standard deviation increased from 0.2712 to 0.3851,with a range of 0.1139.The exchange rate reform mechanism is the main factor affecting the sudden change of the RMB exchange rate and stock market volatility structure.The market-oriented reform mechanism continues to narrow the gap between onshore and offshore RMB exchange rate.Fourth,construct a static and dynamic spillover index model based on variance decomposition to study the information spillover effect.The spillover index of VAR(4)order variance decomposition is constructed,and the information spillover value of the dynamic rate of return and volatility is measured by 200 rolling windows.The dynamic directivity and persistence of spillover effects are improved from the aspects of overall information spillover value,single market net spillover and paired net spillover.The characteristics of dynamic net spillovers are obtained by calculating the difference between spillover(TO)and the recipient(FROM).In order to further test the stability of the model and the reliability of the conclusion,the VAR will be set to 2-6th order,and the prediction period will be set in the range of 5-10 days.The empirical results show that,in terms of size and intensity,there is an opposite trend between the yield spillover effect and volatility spillover of each market,that is,the return correlation between them is not high,which does not mean that the possibility of risk contagion between them is low.In terms of directional persistence,the spillover effects of volatility are alternating in both directions,that is,the infectors and bearers of the risk.It is necessary to systematically study the dynamic spillover effect between the RMB exchange rate and the stock market from the two ways.The main innovations of this dissertation are as follows:First,the mean and variance endogenous structure tests and dynamic models are used to capture structural anomalies.Most of the articles select the conditional correlation coefficient obtained from the dynamic model to analyze the dynamic spillover effect and do not delve into the structural problem of the conditional correlation coefficient.In the discrimination of structural change points and sample segmentation,most articles use subjective subsamples or interval segments to construct models to avoid the problem of stationarity.At the yield level,the mean structure change test is selected,and the variance structure change test is selected at the volatility level so that the corresponding research object of the structure change test conforms to the economic meaning.According to the sequence characteristics of return and volatility,this dissertation constructs a dynamic empirical model and two methods of structural change test and searches for structural change points through the process generated within the data.In addition,the Bai-Perron change test adjusts the default ε = 0.15 to 0.05 to improve the accuracy of the process of finding structural change points and adjust the modified ICSS algorithm to improve the operation speed.Second,two methods of time-varying parameters and rolling windows are used to describe the nonlinear dynamic relationship to improve the accuracy of the research measurement.At present,most financial time series models have been able to study the nonlinear problems between multi-markets,but because of the limitations such as the assumptions of the model,dynamic equations and rolling windows are rarely involved.In the choice of empirical model,time-varying t-Copula and DCC-GARCH are selected to study the rate of return and volatility.The conditional correlation coefficient proposed by Engle can be used to study the multi-dimensional variable model,and the assumption of the constant correlation coefficient can be replaced by the dynamic equation,which can be used to estimate the large-scale correlation coefficient matrix and has a good computational advantage in studying the market information of different markets.The sliding window is able to frame the time series and calculate the statistical indicators in the frame according to the specified unit length.It is equivalent to a slider of specified length sliding on the scale,and each unit of sliding can feedback the data in the slider.At present,both are mainstream research methods to describe the time variation of financial time series,which makes the dynamic spillover effect of this dissertation more comprehensive.Third,construct the spillover index based on variance decomposition,and compare and analyze the return and volatility of the four indices.Most of the studies on the dynamic relationship between the two do not take into account the two levels of return and volatility,and can only be studied in pairs,the research only stays at the level of the correlation coefficient,does not reflect the direction of spillover and other characteristics.The static and dynamic methods are used to study the four indexes,which not only includes the overall spillover degree but also analyzes the information spillover and spillover effects of the other three indexes for one index.compare and analyze the rate of return and volatility.The information spillover index model increases the dynamic directional transformation,reflects the directional dominant relationship between the spillover and the receiver,and reflects the relationship between the structural alternation of direction and major financial events.