Exchange Rate And Stock Prices Relationship

Currently, with the persistent appreciation of RMB exchange rate, it is a valuable study on how exchange rate affects China's stock market. This thesis discusses the relationship between Shanghai stock market price and real effective exchange rate (REER) of RMB, and we have got two conclusions as follows.Firstly, in China's stock market there is no long-term co-integration relationship between REER and Shanghai Composite Index (SCI). At the same time, there is unilateral Granger causality between REER and SCI. In other words, the REER change leads to the SCI change.Secondly, there is no long-term co-integration relationship between REER and Shanghai B Share Index (SBSI). At the same time, there is unilateral Granger causality between REER and SBSI. In other words, the REER change leads to the SBSI change.In order to alleviate the negative influence of RMB exchange rate on stock market, the thesis puts forward the following suggestion. To stabilize the exchange market and dilute the short-term RMB appreciation expectation, we suggest the regulator set a goal on the medium and long term appreciation of RMB exchange. To eliminate the negative impact of hot money on China's stock market, it is necessary to transfer the short-term appreciation expectation to persistent appreciation in medium and long period.