The Research On The Relationship And Transmission Mechanism Between Exchange Rates And Stock Returns-Based On The PVAR Model

With the gradual deepening of the world economy globalization and financial liberalization,countries have become more and more open to the outside world.The international flow of goods,information,services,capital and other elements has become more free and smooth,which has effectively promoted the rational allocation of limited resources on a global scale.However,at the same time,with the formation of interest rate and exchange rate marketization mechanism,the linkage between the markets becomes closer.Throughout the global history when the stock market and the foreign exchange market fluctuate greatly,it can be found that there is a significant internal linkage between the exchange rate and the stock price.A market risk exposure will be quickly passed to other markets,causing further decline.In this context,this paper attempts to explore the relationship and transmission path between exchange rate and stock price movements,hoping to avoid large fluctuations in asset and product prices and to prevent systemic financial risks.What's more,it can provide a theoretical basis for the state to formulate relevant policies and multinational corporations to resist risk shocks.This paper uses literature research,theoretical analysis and empirical analysis.Firstly,the theoretical and empirical research on the relationship between exchange rate and stock price changes is reviewed,and the theory of correlation and transmission mechanism is separately summarized.Then,based on the full consideration of the different economic developments of the countries in the world,nine developed market economies and nine emerging market economies are selected as samples.Then selects the quarterly data of macroeconomics variables from 2008 to 2017.According to the existing theoretical model,the paper builds four indicators: the real effective exchange rate index(ER),the relative stock return rate(R),and the benchmark interest rate(IR)representing the capital flow channel,and the relative value of the current account balance(CA)to represent international trade channel.As for the method,panel vector autoregressive model(PVAR model)is used to study the correlation and the transmission mechanism between the exchange rates and the stock returns of the total sample and the two subsamples,which is attempted to reveal the phenomenon that may be concealed.The main conclusions are as follows:Firstly,as for the Granger Causality between the real effective exchange rate index and the relative stock returns,a one-way Granger Causality is found from the real effective exchange rate index to the relative stock return rate for emerging market sample,which is consistent with the research-approved flow-oriented models.But for the total sample and developed market sample,no Granger Causality is found,which may be related to the market control of the developed market economies after the hard hit from financial crisis,so effective methods are adopted to avoid foreign exchange risks.Secondly,when there is a positive shock on exchange rate,the impact on the stock market is positive for the total sample.But in the two subsamples markets,the fluctuations are more frequent,which have different directions in the early stage,and a small positive impact after four periods.On the contrary,when a shock is applied to the stock market,the impact on the real effective exchange rate index has differences,a positive impact can be found for emerging market sample and a negative impact can be found for developed market sample.For the total sample,the impact is positive and then negative.Thirdly,the transmission mechanism is explored through the decomposition of variance.It is found that the emerging market economies conduct the international trade channel in the first few periods,but the effect is limited.The transmission of capital flow channel is more effective in the long run,indicating that emerging market economies have already achieved certain effects on the gradual opening up of capital markets.For the developed market economies,based on the smooth and improved capital flow mechanisms,capital flow channel becomes the primary transmission path.But in the long run trade channel is more significant,and a time lag effect is found.