The Study of the Relation Between Stock Market Fluctuation and Monetary Policy
|School||Dongbei University of Finance|
|Keywords||Monetary Policy Stock Market Fluctuation Cointegration Test|
Chinese stock market has developed with a shockingly rapid speed in recent years, however, it has the phenomenon of rising and falling irregularly which has’ greatly impacted the stability of the national finance and the healthy development of economy. As the "barometer" of the national economy, the fluctuation in the stock market has a huge impact on the economic development. Consequently it has some influence on the formulation of economic policy. Vice versa, economic policy also has a heavy influence on the fluctuation of Chinese stock market. In 2007, in order to bring down overheated economy, the People’s Bank of China raised the interest rate for the six times and enhanced the bank reserve against deposits rate, thus RMB interest rate on one-year deposits savings has. moved up from 2.52% to 4.14%. In 2008, shocked by the U.S. subprime mortgage crisis, domestic stock market fell sharply, and production began atrophy. With a view to stimulating economic growth and avoiding severe economic downturn, the People’s Bank of China cut interest rates for four times, then the RMB interest rate on one-year deposits savings fallen from 4.14% to 2.25%. Therefore, the formulation and implementation of monetary policy has a gigan effect upon controlling the fluctuation in the stock market. It is very important for Chinese stock market regulatory authorities to further improve the supervisory measures and for the government to supervise and develop the stock market through the monetary policies.Firstly, this paper summarizes the stock market and the monetary policy from the layers of theory. The theory of the stock market is made up of the causes and characteristics of stock market fluctuation. The theory of monetary policy includes monetary policy aims, monetary policy instrument and the transmission mechanism of monetary policy. Then, this paper takes the Shanghai Composite Index and Shenzhen Component Index as the research object and collects the daily closing price between January 2,1997 and December 31,2009. By the use of ARCH models, it takes an all-round study about the fluctuation in the selected stock index. On this basis, it studies the fluctuation of Shanghai and Shenzhen Stock Market. After analyzes the fluctuation, tight association between the two stock markets is found out. Therefore, I only use the Shanghai Composite Index to represent the stock market in the following analysis. When I research the relationship between monetary policy and stock market, I make a special effort to study how the monetary policy affects the stock market, and collect the monthly data between January 1997 and December 2009, including the Shanghai Composite Index, GDP, CPI, interest rate on one-year deposits savings, M0, M1 and the exchange rate of RMB and U.S. dollar. This paper uses ADF test, the cointegration test, the Granger Causality test, the impulse response function and variance decomposition method etc. of econometric technology to analyze the impact of interest rates, money supply, and exchange rate on the stock market.The results from empirical researches show that Shanghai and Shenzhen Stock Market have a tight association in the analysis of fluctuation. Both of them take on peak, fat tails, left side, non-normal distribution, stationary sequence and the clustering of fluctuation. The fluctuation caused by the bad news is larger than that of the good news. From the parameter fitting, the EGARCH(1,1) model is the best. During the research on the relationship between the monetary policy and stock market, I find that interest rates, money supply and exchange rates have a great influence on the stock market. The interest rates are negative. MO is a positive, and M1 is negative in long-term., while the M1 are positive in short-term. Exchange rate is negative.According to the results of the empirical research, I think that we should strengthen Chinese monetary policy and stock market from the following aspects. Improve the quality of investors and prevent excessive speculation. Establish the association between the money market and capital market. Promote the process of interest rate market actively. Develop and improve the stock market. Adjust the role of government.