Announcement Effects Of The Reserve Requirement Adjustment On Stock Market Volatility In China

Monetary policy is an important tool of macro-economic control. In the past three decades, central bankers, governments and economists have reached a consensus that price stabilization should be the first goal for the monetary authority. An efficient capital market can play an effective role in boosting economic development. Implementation of monetary policy often influences the price of financial assets, especially share prices to some extent. The existence of the stock market also have implications for monetary policy how it transmits. And the relationship between the asset prices and monetary policy, including the how to unclog transmission channels of monetary policy have been researched by lots of important papers. After 20 years of development, China stock market has been an index to real economy. In virtue of the required reserve policy’s announcement date and implementation date are different, so in aspect of studying the impact of the reserve policy announcement on the stock market volatility is the way to explore the effectiveness of China’s monetary policy.At the beginning, this paper analyses the mechanism of monetary policy and how monetary policy affects stock market, further detailed analyzes of the required reserve policy transmission channels to stock market. Then by introducing the required reserve policy’s characteristics of the various stages in China, we depicts the volatility in share price after the required reserve adjustment, then compare it with the results of the theory analysis. Under the event study, selecting the required reserve adjusted data for the period from January 2008 to December 2015, the paper analyzes the Shanghai Composite Price Index’s daily logarithmic yield’s changes under the two different estimated window. If there are abnormal returns in China’s stock market and abnormal returns pass the test of significance, which means announcement effects exist. Finally, according to the research results we offer our own suggestions.Then, this paper points out that when central bank adjusts the required reserve ratio, the stock market will gain abnormal returns, thought t-test announcement effects of stock market volatility is significant. While the direction of volatility is not always consistent with the theoretical analysis. Analysts believe that, there are obstacles in the process of monetary policy transmission which may affected by the degree of stock market maturity, the expectation factor also plays an important role in this issue. Empirical data and the empirical results verify that short-term effects of monetary policy impact on the assets price fluctuation is not obvious, the effect of monetary policy implementation to stabilize the financial market is not satisfactory. Analysis of the reasons, put forward the following suggestions. First, central bank should to some extent ignore movements in the capital market in the monetary policy. Secondly, China’s monetary authorities should pay more attention to the role of anticipation. Thirdly, in order to achieve the policy objectives, central bank can take advantage of the coordination between monetary policy and other policies, attach importance to the innovation of monetary policy instruments. Finally, improve the efficiency of the stock market to enhance the effectiveness of monetary policy.