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

Listed author(s):
  • Juan Carlos Cuestas

    ()

    (Department of Economics, University of Sheffield)

  • Bo Tang

    ()

    (Department of Economics, University of Sheffield)

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.

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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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Paper provided by The University of Sheffield, Department of Economics in its series Working Papers with number 2015024.

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Length: 28 pages
Date of creation: Dec 2015
Handle: RePEc:shf:wpaper:2015024
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