The Relationships Between RMB Exchange Rates And Stock Price In China

The foreign exchange market and the stock market are two important financial markets; the relationship between financial markets has been the focus of attention. With the opening up of China, contact of China to the world is getting close. It depends on the exchange rates and stock price to connect. Domestic and foreign scholars have done researches on the relationship between exchange rate and stock prices, but they did not reach a consensus. The relationship between RMB exchange rate and stock price in China requires further study. With the reform of China’s exchange rate system and the open of the capital account, will the relationship between exchange rate and stock price change? What kind of long-term relationship and the short-term relationship will they be? The answer is important. It helps to predict a market through another market, which can help the investors to make rational investment decisions, which can benefit the international company to manage the exchange rate risk and also help policy makers to make better decisions.In theory, this paper explains the relationship between exchange rate and stock prices, combined with the theory of interest rate parity and the Gordon model, Mundell-Fleming model and Gordon model to construct the ideal model of relationship between exchange rate and stock price under the open economy.In respect of empirical analysis, the present research used two variables do Grainger causality test or set up VAR model, VECM model and GARCH model, or they used three variables in the model with the interest rate variable or international capital flow variable, few of them used the overall macroeconomic variables model. In this paper, a multiple regression model is built to test the exchange rate’s impact on the stock price along with other important factors. The result shows the RMB exchange rate (direct quotation) was negatively correlated with the Shanghai Composite index. However, this conclusion seems obscure. In order to further study the relationship between exchange rate and stock price in China under the different opening stages, the research sample is divided into four stages, using the daily data and VAR model in order to study the dynamic relationship between exchange rate and stock price. The conclusion is:the relationship is different; the more open the economy environment, the closer the relationship between exchange rate and stock prices is. Relationship between exchange rate and stock price in different industries can be different; this paper chose eight industry indexes from different industry to study their relation with the exchange rate. The result is the same in the micro level: Their relationships with the exchange rate are relatively weak. Because of the lack of China’s economic opening, the relationship between exchange rate and stock price cannot get good conduction.Finally, according to the theoretical and empirical conclusion, is paper give some advice and predict the future relationship between exchange rate and stock prices:With China’s economy further opening, China’s exchange rate gradually realizing free floating, with the market-oriented interest rate reform, the gradual liberalization of the capital account, the relationship between exchange rate and stock price will be more and more close, and the impact of stock price to the exchange rate will gradually appear.