Research on the Dynamic Relationships Between RMB Real Effective Exchange Rate and Shanghai Composite Index

Citation

Jin, Ying. (2021). Research on the dynamic relationships between RMB real effective exchange rate and shanghai composite index. (Master’s independent study). Bangkok: Siam University.

Abstract

With deepening economic globalization and increasing uncertainties in the growth of the world economy, there are more substantial linkage effects and far-reaching interactions among the world’s economies. The threat of global trade frictions has increased, and financial companies’ links between markets are closer than ever. More development opportunities arise, making the linkage between financial sub-markets easier to transfer risks across markets and countries. Therefore, preventing systemic financial risks has become an eternal theme for countries to maintain stable economic development.

China s financial market is relatively new, and the foreign exchange market and the stock market are essential components. The RMB exchange rate and the stock price index are taken as the prices of these two financial markets, respectively. With the increasing marketization and openness of China s financial market, the relationship between the two is getting closer and closer, and the forms of risk and the transmission mechanism faced in economic development are increasingly complicated. Therefore, an accurate grasp of the dynamic relationship between the two under the entire macroeconomic system is significant for preventing systemic financial risks and promoting the stable operation of China s macroeconomics.
Combined with literature and theoretical analysis, this paper selected two core indicators of the RMB real effective exchange rate and the Shanghai Composite Index. It introduced short-term international capital flows and broad money supply as intermediary transmission variables. From June 2001 to June 2019, The monthly data of the above four economic variables were used as research samples. The SVAR model analyzed the internal economic relationship between the variables and characterized the path and proportion affected by the random disturbance interference term. Then, the variables were combined under the SVAR model. The quantile regression method analyzed the heterogeneous effects of exchange rate prices and stock prices at different quantile points.

The empirical research results showed that: (1) There exists a long-term equilibrium relationship between the two core indicators. The two are positively related, and with there is a profound impact of foreign exchange markets on the stock market. However, this relationship is relatively weak; (2) After the 8.11 New Exchange Reform in 2015, the short-term effects between these two became more complicated, with asymmetric effects being significant. The impact of the foreign exchange market on the stock market became progressively more flexible; (3) The transmission mechanism between the two core indexes is not smooth enough. The intermediary transmission of international short-term capital flows has become more critical, but the transmission path using the money supply as an intermediary variable is not smooth; (4) The relationship between the two core indicators in China was unstable. The dynamic relationship between the two markets changed in the degree and direction at the high quantile level.

Finally, combined with the research conclusions, this paper put forward some suggestions at the end of the article. The study recommends deepening the reform of the RMB exchange rate mechanism, improving the stock market systems construction, closely monitoring short-term international capital flows, coordinating and coordinating macro-control policies, and guiding.

Keywords RMB Real Effective Exchange Rate, Shanghai Composite Index, Structural Vector Auto Regressions Methodology, Quantile Regression.

Research on the Dynamic Relationships Between RMB Real Effective Exchange Rate and Shanghai Composite Index

Master of Business Administration (International Program), Siam University, Bangkok, Thailand

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