An analysis of the relationship between exchange rate and stock price in ChinaTools Fang, Lu (2021) An analysis of the relationship between exchange rate and stock price in China. [Dissertation (University of Nottingham only)]
AbstractIn this dissertation, the relationship between four main Chinese stock prices and the exchange rate of Renminbi against US dollars are investigated. The sample series is comprised of four China Security Indices (CSI100, CSI200, CSI300, and CSI500). Daily closing data for these variables from 1st August 2015 to 1st August 2021 are used to study the interaction between the stock prices and the exchange rate. During the empirical process, first, the ADF test proves that all variables are non-stationary but integrated of first order. Next, when Johansen's cointegration test is used, no indication of a long-term cointegration relationship between the two series is found. Then, the Granger causality test is used to determine the causal relationship between variables. There is only one-way causality from CSI100, CSI300 to the exchange rate, and no causality in the remaining stock indices and exchange rate. Finally, impulse function and variance decomposition are used to study the dynamic behaviour of stock prices and exchange rate. The findings of the impulse response function indicate that changes in the CSI100, CSI200 and CSI300 indices initially have a slight positive impact on the CNY/USD exchange rate, then the impact becomes negative. The impact on the exchange rate of the CSI500 index is positive. While the impact of exchange rate movements on all four market indices is negative, the results of variance decompositions indicate that the impact from change in stock prices to the exchange rate is more significant than the impact from change in the exchange rate to stock prices. Finally, the paper presents an analysis of the empirical results.
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