The impact of monetary policy on banking and finance stock prices in China

Abstract

In this study, we examine the impacts of changes to the required reserve ratio (RRR) on banking and finance stock prices in China from 2007 to 2012 using multiple variance ratio tests and vector error correction models. The efficient market hypothesis is rejected during the earlier increases in required reserve ratio (2007–2008) in the Shanghai A-market, and A-share prices negatively respond to increases in RRR. In contrast, both Shanghai A- and Hong Kong H-markets are efficient, and negative effects of RRR are not clearly observed during periods of stable RRR (2009–2010) and during a recent increase in RRR (2010–2012).

Keywords:

• Chinese market
• market efficiency
• monetary policy
• required reserve ratio

JEL Classification:

• E52
• G14
• G15
• G18