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Exchange Rate Changes and Stock Returns in China: A Markov Switching SVAR Approach

Author

Listed:
  • Juan Carlos Cuestas

    () (Department of Economics, University of Sheffield)

  • Bo Tang

    () (Department of Economics, University of Sheffield)

Abstract

This study empirically investigates the spillover effects between exchange rate changes and stock returns in China. Evidenced by multivariate Granger causality tests, stock returns Granger-cause exchange rates changes, but exchange rate changes exhibit little effect on stock returns. As the conventional structural VAR (SVAR) approach fails to examine the contemporaneous effects, we apply the Markov switching SVAR model to allow the coefficients and variances of endogenous variables to be state-dependent. The regimeswitching estimates indicate that the fluctuation in Shanghai B-share returns has positive effects on the remaining stock markets, but a negative impact on foreign exchange markets. This also reveals that the spillovers have longer durations during two financial crisis periods. Finally, this paper suggests investors to pay attention to systematic risks from RMB policy changes, which might alter the current unidirectional causality in the Chinese financial market.

Suggested Citation

  • Juan Carlos Cuestas & Bo Tang, 2015. "Exchange Rate Changes and Stock Returns in China: A Markov Switching SVAR Approach," Working Papers 2015024, The University of Sheffield, Department of Economics.
  • Handle: RePEc:shf:wpaper:2015024
    as

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    File URL: http://www.sheffield.ac.uk/economics/research/serps/articles/2015_024
    File Function: First version, December 2015
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    exchange rate changes; stock returns; Markov switching SVAR; Chinese financial market;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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