The Impact Of China’s Interest Rate Policy On The Stock Market:Analysis Based On The Industry Perspective

With the development of China’s stock market, its fuction as the barometer of the national economy has become widely recognized, especially for the issue of the interaction between the stock market and monetary policy, has attracted more and more attention in recent years. As the most direct policy instrument on regulating national economy, the relationship between monetary policy and the stock market has become a edging topic. Therefore, the study of the impact of China’s interest rate policy on the stock market and the strategy proposals is of important theoretical and practical value.In order to test the relationship between the stock market and monetary policy, this article subdivides the stock market into22industry sectors, and to study the influence of interest rate policy on Shanghai Composite Index and22industry indices respectively. Based on the results of the study, we analysis the reason and propose the appropriate policy recommendations.This paper is composed of five parts.The first part introduces the background and the study results at home and abroad. On this basis, we put forward the innovation and deficiencies of this paper.The second part analysis the impact of interest rate on the stock prices and introduces several common stock pricing models, including the dividend discount model, zero-growth model and the constant growth model. Then, we analysis the theoretical relationship between interest rate and stock prices from the following four channels:deposit yields, corporate behavior, consumer expectations and macroeconomic environment. In general, there is a inverse relationship between interest rate and stock prices. If the interest rate increases, the stock prices will decrease, or if the interest rate goes down, the stock prices will go up.The third part descibes the measurement methods to study the issue, including the unit root test, cointegration test, LM test and error correction model, which lay the foundation for empirical analysis below.The fourth part of this paper is empirical studies. In order to study the impact of interest rate on the overall stock market price and22industry prices, we select108sample data, including the average monthly closing price index data of Shanghai Composite Index (ticker symbol:SH000001) and22industry indices, and the monthly effective interest rate, from January2002to December2010. First, launching an ADF test to the data, which confirms that the sample data is a first-order single whole sequence. Then conducting the co-integration test between the interest rate and the benchmark Shanghai Composite Index, and between the interest rate and22industry, respectively. The cointegration test results indicate that regression model residual series between the stock price and the benchmark Shanghai Composite Index as well as22sectors index are stationary. All through this inspection, we can draw a conclusion that a long-term stable relationship of cointegration do exist between interest rate and stock price. So a ECM model is established consequently. At last, we summarize the test’s results, analyze the causes of differences, including the following reasons. First, it depends on the current situation of China’s stock market; Second, the money market is imperfect; Third, price-earnings ratio of the stock market is lower than the elasticity of interest rate; Fourth, the primary stock market has a higher rate of return; Fifth, the leverage of interest rate policy on the stock market has not been reflected; Sixth, each industry has different sensitivity on interest rate.The fifth part puts forward the appropriate policy recommendations according to the empirical results and analysis above, including the following factors. First, to develop and improve the stock market; Second, to speed up the process of marketization of interest rate; Third, to formulate the interest rate policy based on the characteristics of the industry’s.