Relationship Between Exchange Rate And Stock Price Under Local Currency Appreciation

The research methods of this paper combine the theoretical analysis and empirical test. Firstly, we analyze the relationship theoretically between the exchange rate and the stock price and the pathway of interaction. On this basis, we analyze the event that the appreciation of yen caused the rose of the Nikkei index. Through the analysis of Japan’s economic situation and the measures taken by Japanese government, the basically conclusion is that the most direct reason of the rose of Nikkei index, as well as the Japanese economic bubble, of course, it has the inherent economic reasons, is the inappropriate fiscal and monetary policies taken by Japanese government. The pathway is as fellows. The appreciation of yen affected the economy, and the Japanese government adjusted the fiscal and monetary policy. The inappropriate policy caused the asset bubble. Then, this paper use the empirical test to examine this thought.Since Japanese yen in1985-1992confronted appreciation which is the same as what RMB today, this is a good reason to explore Yen experience to observe what will change for the relationship between exchange rate and stock price in China with RMB appreciation, in this way to get some implications from it.This paper is organized as follows:Chapter one is introduction; chapter two explores main and update literature on the topic, focuses on mechanism of interaction between exchange rate and stock price. Make an analysis especially about impact of monetary authority policy on exchange rate and market price. Chapter three observes historical event of Japanese Yen in1985-1992, to analysis its reasons and performance after that. The following chapter has made an assessment of fiscal policy and monetary policy implemented by Japanese government. And it is also using co-integration method to test the relationship between exchange rate, monetary supply and stock. Chapter five makes a comparison between these two countries’ exchange rates and stock prices under the background of local currency appreciation,and chapter six derives the implication for China.