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Research on the Correlation between Chinese Stock Market and Monetary Policy

Author: SongGuangYu
Tutor: GaoYing
School: Northeastern University
Course: Finance
Keywords: the stock market the monetary policy correlation
CLC: F832.51;F822.0
Type: Master's thesis
Year: 2010
Downloads: 17
Quote: 0
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Monetary policy is one of the main instruments that the Central Bank use to regulate the macroeconomic. The stock market makes a certain effect on the mechanism of the monetary policy which is a new challenge to the traditional mechanism. The stock market is not only the most important part of the capital market, but also the basis of the financial derivatives and products. The development of the stock market and the volatility of the stock price play a decisive role on the stability and improvement of the capital market which can also impact the operation environment of the monetary policy, make the policy adjusted with the change of the external environment. Furthermore, they can even make a impact on the entity economy. Accordingly, the analysis of the relativity between the stock market and the monetary policy is instrumental to improving the monetary policy efficiency, solve the problem that whether the Central Bank should react to the stock market fluctuations and other practical issues apart from lessening the bad effect of the stock market makes on the regulation of the monetary policy. Above all, it can accelerate the healthy development of the stock market.In this paper, both theoretical and empirical aspects of the correlation between the monetary policy and the stock market volatility have been demonstrated. Firstly, a theoretical elaboration is made about the definition of the monetary policy and the stock market and the interrelationship. Secondly, with the financial econometrics, a empirical research on the correlation between them is presented with the latest data and the representative variables.The methods including ADF Test, Johansen Co-integration Test, Vector Error Correction Model, Impulse Response Functions and so on. The content of the empirical analysis includes the effect that the stock market volatility makes on the money supplement and velocity of money circulation, and the effect that the fluctuations of the rate and money supplement make on the stock market. The empirical conclusions are made that no matter in the short time or the long time, the fluctuation of the stock market will have a great impact on the money supply and the velocity of money circulation. And therefore, the influence that the rate and the narrowed money supply make on the stock market is identical with the theory while a certain time lag exists. Meanwhile, the empirical results about the effect that the generalized money supply makes on the stock market is different from the theory. Finally, with the consideration of the specific situation of China, the advice is made that the Central Bank should concern the fluctuation of the stock market when it constitutes the monetary policy.

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CLC: > Economic > Fiscal, monetary > Currency > China's currency > Principle of policy and its elaborate
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