The linkage between exchange rate and stock prices: A Chinese Context
Cardiff Metropolitan University
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Abstract: This paper is to examine the interaction between the Renminbi (RMB) nominal exchange rate and China stock price with VEC models using data from January 1994 to December 2013. The examined period has been divided into pre-reform and post-reform two sub-periods to reflect the impact of China exchange rate reform on the dynamic relationship between RMB exchange rate and stock prices. ADF unit root tests results suggest that RMB nominal exchange rate and China stock prices are non-stationary level series. But they are stationary at first differences. Therefore, Johansen co-integration test was performed on the 6 time series in 3 pairs to examine whether there are co-integrated relations existing between RMB exchange rates and stock prices. The results indicate long-term relations between these two variables. Later on, Granger causality test was adopted to reveal the correlated relationship between RMB nominal exchange rates and China stock market prices from both long run and short run perspectives. The results suggest that only from the full period lens it can be found that China stock market prices granger cause RMB exchange rates. In the following part, Chow test were performed to examine the stability of the regression and see if any structure break. The result shows a significant different trend before and after Chinese currency exchange rate reform. The point of July 2005 had substance impact on the behavior pattern between RMB exchange rate and China stock market price.
MSc Financial Management
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