This paper explores the links between the USD/RMB and the Shanghai Stock Index using the ARCH model. The key findings are: the USD/RMB exchange rate and the Shanghai Stock Index are in equilibrium in the long-run; USD/RMB exchange rate is the leading indicator of Shanghai stock index; spot exchange rate is positive to Shanghai Stock Index; spot exchange rate is negative to Shanghai Stock Index in 1 lag; exchange rate movements are significant to stock market volatility when the fixed exchange rate regime is changed into a managed floating exchange rate regime.
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