A Study Of The Correlation Between Rmb Exchange Rate And China Stock Price

The exchange rate and stock price, among others, are two index that of weighty significance in the financial market. The former is the external price of one currency, which reflects the international purchasing power; the latter is always recognized as the barometer of national economy, which is able to mirror the changes occurred in national economy precisely. There is certain internal relationship between exchange rate and stock price, which, by all means, exert impacts on the economy of one country.The year 2005 deserves a signature in the financial history of China. The stock equity detachment reform launched in May,2005 was a critical step to solve the historical leftover factors in China's stock market. Moreover, on July 21, the People's Bank of China announced a new reform plan, according to which RMB would no longer be pegged to the U.S. dollar and China would reform the exchange rate regime by moving into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. The two reforms broke through the barriers that divided the foreign exchange market and stock market of China into two parts, which made the transmission between the two markets possible.Since then, RMB exchange rate and China stock price both experienced sharp rise. After the Sub-prime Crisis however, China stock price witnessed an unprecedented slump while RMB exchange rate was appreciating though, the margin was greatly cut down. Under such background, this paper unfolds its research.This paper starts with the determination theories of exchange rate and stock price through purchasing power parity, interest rate parity, international balance and Gordon model. After that, with some mathematical derivations, the theoretical equation between exchange rate and stock price is presented. The further analysis focuses on the transmission mechanism between exchange rate and stock price, which is from the current account and capital account aspects.After the set-up of theoretical framework, the econometric methods are used to quantify the relationship and transmission mechanism between RMB exchange rate and China stock price, which, by its function, is the examine and replenishment of the theoretical conclusion. The research in this section can be divided into two parts--relationship analysis and transmission mechanism analysis, both of which turn to the analysis before and after sub-prime. In the relationship part, this paper explores the co-integration and causality between RMB exchange rate and China stock price. In the transmission part by contrast, variables in current account and capital account are estimated.The end-of-thesis section is conclusion and suggestion. Before the conclusion is drawn, the paper makes explanations on the empirical result, which is more focused on the explanations on the disparities in the relationship and transmission mechanism between RMB exchange rate and China stock price before and after the sub-prime. At the end, the final conclusion and suggestion is presented.