Study On The Correlation Between China’s Stock Price Index And US Dollar Index

Previous studies about impact factors on stock price index are normallyconcentrated on interest rates, CPI, money supply and exchange rate levels.Researches on the correlation between stock price index and the US Dollar Indexconducted by foreign and domestic scholars is quite few. Based on the classicaltheories in economics, finance, international finance and induction of the previousstudies, this paper carries out detailed research on the correlation between China’sstock price index and the US Dollar Index. The research methods adopted in thispaper include the combination of theoretical and empirical analysis, the combinationof qualitative and quantitative analysis, multi-level comprehensive analysis andcomparative analysis.At the beginning, this paper summarizes the traditional theories on the impactfactors of stock price index, which include economic growth, economic cycles, moneysupply, interest rates, CPI, exchange rate and other factors. Then, this paper introducesthe concept, origin, calculation formula and influencing factors of the US DollarIndex, and reveals its important connotation as a barometer of international capitalflows. This paper theoretically explores four ways about how the US Dollar Indexaffects China’s stock price index. It also analyzes the different impact on the A and Bshare index and the impact on the sector index brought by the US Dollar Index. Onthe basis of theoretical analysis, this paper sets July21,2005as the time cut-off point,and carries out a variety of rigorous empirical studies on the correlation betweenShanghai Composite Index and US Dollar Index during the selected time period withthe methods of ADF Unit Root Test, Co-integration Test, the VAR Model Test, theVEC Model Test and Granger Causality Test. As a conclusion, the ShanghaiComposite Index has a weak positive correlation with the US Dollar Index before theexchange rate reform; however, it turns into a significant negative correlation betweenthem after the exchange rate reform. This paper also empirically tests the impact on Aand B shares index and sector index which is brought by US Dollar Index, and drawsa conclusion which is consistent with the theoretical analysis. Finally, this papersuggests that both investors and regulators on China’s stock market should concernabout the US Dollar Index in order to pursue interests and avoid disadvantages.Besides, specific measures are also provided for the purpose of reducing the negative affects on China’s stock market caused by the unusual fluctuations of US DollarIndex.