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Dynamic Linkage Between Stock and Forex Markets: Mechanisms and Evidence from China

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  • Yan Fang
  • Yi Yang

Abstract

This paper examines the dynamic linkage between Chinese stock and forex markets from July 2005 to December 2023, and explores the key factors influencing this relationship. To this end, we employ a copula-based aDCC-CGARCH framework to analyze the dependence structure, use a structural break analysis to identify shifts in market interdependence, and apply a RR-MIDAS regression to investigate the underlying determinants, with a particular focus on uncertainty, economic fundamentals, and capital flows. The results reveal a time-varying linkage with significant breakpoints corresponding to the global financial crisis, domestic market reforms, the U.S.-China trade conflict, and the COVID-19 pandemic. Moreover, the long-run volatility component exhibits high persistence in both markets, with greater persistence observed in the currency market than in the stock market. The RR-MIDAS regression results indicate that Chinese economic policy uncertainty and foreign investments significantly accelerate the linkage, while GDP and the capital control policy significantly decelerate the linkage. These findings provide important insights for policymakers, global investors, and financial market regulators.

Suggested Citation

  • Yan Fang & Yi Yang, 2026. "Dynamic Linkage Between Stock and Forex Markets: Mechanisms and Evidence from China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 62(2), pages 398-419, January.
    • Handle: RePEc:mes:emfitr:v:62:y:2026:i:2:p:398-419
    DOI: 10.1080/1540496X.2025.2535710
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