Study on relationship between RMB exchange rate and stock market

In the21st century, due to the constant accelerationof of economic globalization and communications technology particular the growing popularity of the network, these factors significantly raise the level of global financial liberalization. Stock market and foreign exchange markets as an important component of the financial markets, interconnected between the two levels with increasing liberalization increasingly closer. In April2005our country has been split share structure reform, followed in July there were exchange rate formation mechanism reform, the introduction of the two reform measures, which greatly enhanced the vitality of the stock market and foreign exchange market development, and the Shanghai Composite Index rose sharply, while the yuan-dollar exchange rate has continued to rise in the currency appreciation is expected, boosting the number of international hot money into the current round of the bull market in mainland China, but also to a certain extent However, an unprecedented financial crisis quickly swept the globe, global economy, particularly the U.S. economy hit received, the Chinese economy can not stay because of the worsening foreign trade, China’s economy received a great deal of influence, the Shanghai Composite Index fell sharply, from into a shock adjustment. And the volatility of the stock market is different, the RMB against the U.S. dollar stabilized during this period, remained at a level of around6.80. Until June2010, the central bank once again on the RMB exchange rate formation mechanism of market-oriented reforms, and further increase the flexibility of exchange rate fluctuations, the RMB against the U.S. dollar once again entered a slightly upward channel. During this period, A-share market continues to shock and a slight adjustment downward trend, still in a bear market.In this paper, the basic theory related to the article as a logical starting point, first expounded the theory and decision theory about the stock exchange’s decision, and then introduced on the correlation between the two theoretical models of two classic-traffic-oriented model and stock-oriented model these two models are the current share price and exchange rate correlation study on the basis of the model. In addition, we also extend existing theories based on the Mundell-Fleming Model theoretically further analysis in an open economy correlation between stock price and exchange rate, allowing us to better understand both interaction mechanism between the two markets. Next, this article from a variety of angles interest rates, money supply, capital flows, and other psychological analysis of the transmission mechanism of the expected foreign exchange market and the stock market. Followed by the empirical analysis of this article, the paper selected sample data daily data July22,2005to August8,2013, as the article from the use of VAR models and MGARCH-BEKK model of exchange rate and stock price mean overflow effect analysis and volatility spillovers analysis. Mean spillover effects analyzes empirical results indicate the presence of a positive long-term co-integration relationship between the RMB against the U.S. dollar exchange rate and stock prices, with two-way Granger causality between the two, the impulse response function analysis shows that long-term effects between the two relatively weak relationship between exchange rates and stock prices relatively large impact; MGARCH-BEKK model empirical results show that there is a clear volatility spillovers between foreign exchange and stock markets, stock prices and exchange rate risk for transmission is relatively large. The relationship between the two tend to flow-oriented model, indicating that compared with developed countries, China’s foreign exchange and stock markets need to be further improved. The last part of the article is the policy recommendations in this paper based on the previous empirical analysis, this paper presents the perfect China’s foreign exchange market and stock market-related measures, hopes to continue to improve the level of market reform in both markets, enhance market dynamism for China economic development to provide a good financial environment.Due to volatility in the foreign exchange market and the stock market, and mutual relations are also complicated, which makes the study of the correlation between the two has become more urgent. Explore the linkages between the exchange rate and the price not only to understand the economic conditions in the open operation mechanism between the two is more important for China to resolve potential financial risk to better promote China’s economic reform, especially the reform of the financial sector, vigorous economic development to provide a theoretical support.