An Empirical Research On The Correlation Between RMB Exchange Rate And Stock Price After RMB Exchange Rate Formation Mechanism Reform

After the RMB exchange rate formation mechanism reform on July21,2005, our country began to institute a regulated, managed floating exchange rate regime based on market supply and demand and in reference to a basket of currencies. On June19,2010, The People’s Bank of China announced to promote the reform of RMB exchange rate formation mechanism. All of this have expended the fluctuant scale of RMB exchange rate. The foreign exchange market and the stock market are becoming more and more closed. Outside this context, it is significant to find out the relationship between exchange rate and the price of stock. Firstly, it will be useful for the government to make policy. Secondly, it can be used by investors when they make decision of investing.This paper analyzes the correlation between RMB exchange rate and stock price from two ways:the way of theoretical analysis and the way of empirical analysis. In the theoretical analysis, this paper introduced the flow-oriented model and the securities-oriented model. And then, this paper introduces five pathways of transduction:basic money supply, interest rate, the trade of import and export, the flows of international capital and the psychological expectation effect.In the empirical analysis, this paper discusses the relationship between RMB exchange rate and stock price through unit root test, co-integration analysis, vector error correction model (VEC) and Granger causality test.In the analysis of the RMB exchange rate against the dollar and shanghai and Shenzhen300index, the results show that:(1)In the long term, there is stable relationship and negative correlation between RMB exchange rate against the dollar and Shanghai and Shenzhen300index.(2)In the short term, the impact of shanghai and Shenzhen300index caused by the change of RMB exchange rate against the dollar is bigger than the impact of exchange rate caused by shanghai and Shenzhen300index.(3) In the direction of Granger causality, Shanghai and Shenzhen300index is the Granger causality to the RMB exchange rate against the dollar, and the RMB exchange rate against the dollar is also the Granger causality to Shanghai and Shenzhen300index.After the introduction of the results of empirical analysis, this paper analyzes the reasons of the results from several pathways of transduction:basic money supply, interest rate, the trade of import and export and the flows of international capital.In order to find out the relationship between RMB exchange rate against the dollar and different industry indexes, this paper replaces Shanghai and Shenzhen300index with four industry indexes. They include financial sector index, estate index, papermaking industry index and textile industry index. The empirical process is as same as the analysis of shanghai and Shenzhen300index. At last, this paper analyzes the results and gives policy suggestions respectively.