Research On The Impact Of Monetary Policy On The Volatility Of Chinese Stock Price

As a means of regulating the economy, monetary policy has been widely used inthe contemporary world. We usually distinguish monetary policy as expansionarypolicy or contractionary policy as their different performance. Theoretically,expansionary monetary policies are expected to stimulate the development of theeconomy while contractionary monetary policies are expected to curb economicbubbles and inflation. As stock market price is supposed to be the barometer ofmacroeconomics, then how can the monetary policy affect the stock market? Basedon this question, we observed the data of the Chinese stock market from2006to2012and analysis the impact on the Chinese stock price based on three parts, the traditionaltransmission, the floating of international capital and the changing of thepsychological expectation of investors caused by changing of monetary policy. Wefound that:First of all, there is a certain bias for the traditional monetary policy transmissionin China, especially during the super bull market in2006-2007and the bear marketduring2012. Secondly, by doing analysis of the international floating capital, wefound that the expectation for CNY appreciation and the arbitrage caused by theinterest increasing can lead to a massive amount of international capital flowing intoChina, which may explain the reason for the failure of monetary policy from one side.Moreover, on the other side, the herding in the Chinese stock market is very serious,leading people to follow the trend of buying shares caused by irrational behavior.With the failure of monetary policy several times in succession, the central bank losesthe prestige of their policy. When the bear market came after2010, the contractionarypolicy could never stimulate the stock market anymore because of the policy failurepreviously, and the market sentiment is difficult to gather.Finally, I presented the conclusions and recommendations based on thephenomena above in the Chinese stock market. I do suggest that the policy should be more proactive and should lead the market trend instead of responding to the markettrend. Meanwhile, it is more significant to improve the effectiveness of China’s stockmarket and change the structure of investors, which can make the Chinese stockmarket much better.