China's Monetary Policy Tools To Use The Fluctuations Of The Stock Index

It has 5 years since the reformation of the share segmentation. China's stock market develops rapid. The residents and enterprise's will on stock investment has strengthened, and the market value of China's stock market and trading volume has been considerable, so the incremental demand on currency can not be ignored. Investors are becoming increasingly sophisticated, more and more, to consider fundamental factors, including monetary policy adjustments. As an important macro-economic control department, the central People's Bank frequently uses the monetary policy to adjust interest rate, deposit reserve ratio and open market operation. Monetary policy adjustments must has great impact on the development of the emerging Chinese stock markets. Based on the above, it has important theoretical and practical significance to analyze the relationship between China's currency and stock markets.In efficient capital markets, the price of financial assets is the most important signal to distribute economy resource. Theoretically, the price of financial asset is determined by economic activities of all market participants, Also, it is able to response for most possible information affecting assets revenue. Stock market is the barometer of the economic. And instruments of monetary policy, which functioned as the strategy and means by the authorities to regulate the economic, will eventually cause the change of the price of stock market.At present, the research on the relationship between monetary policy and the stock market focus on the interest rate and money supply. There is few research for deposit reserve ratio and open market operations. Especially with regard to that how the open market operations affect the stock market, is basically a blank area of research. The general monetary policy tool is directly controlled by the central bank. And the monetary policy tool is including interest rate, reserve ratio and open market operations. Based on the analyzing of the statistical characters of Shanghai index and the influence mechanism of each instrument, this paper builds VAR model and GARCH model to discuss the reaction of stock market to monetary policy operation.According to the result of empirical study, there are differences between the effects of which different instrument influence stock price. Adjusting benchmark rate or required reserve ratio is likely to affect the fluctuation of stock price, however it is uncertain. But it has substantive effect on the stock price for open market operation.