The relationship between stock returns and the foreign exchange rate

The ARDL approach

Gary Gang Tian, Shiguang Ma

Research output: Contribution to journalArticle

23 Citations (Scopus)

Abstract

This study employs the ARDL cointegration approach in order to examine the impact of financial liberalization on the relationships between the exchange rate and share market performance in China. We discovered that cointegration has existed between the Shanghai A Share Index and the exchange rate of the renminbi against the US dollar and Hong Kong dollar since 2005, when the Chinese exchange rate regime became a flexible, managed, floating system. We found that both the exchange rate and the money supply influenced stock price, with a positive correlation. We further show that the money supply increase was largely caused by a huge 'hot money' inflow from other countries in recent years. After local currency appreciation, hot money, followed by the money supply increase, pushed the market into a high level, based on expectations regarding the local currency's further appreciation.

Original languageEnglish
Pages (from-to)490-508
Number of pages19
JournalJournal of the Asia Pacific Economy
Volume15
Issue number4
DOIs
Publication statusPublished - Nov 2010
Externally publishedYes

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