ABSTRACT
This paper investigates the dynamic dependence structure between the Chinese stock market and the real exchange rate of the Chinese renminbi (RMB) with unconditional and conditional copula models for the period July 22, 2005, to December 31, 2017. The results show that the crisis induced significant structural breaks, and the relationship is weak before the global financial crisis but substantially stronger after the financial crisis, regardless of whether the correlation is positive or negative. Our findings have important implications for global portfolio diversification, risk management, and China’s exchange rate policy.
Acknowledgments
We thank Ali M. Kutan and two anonymous referees for their valuable comments and suggestions.
Supplementary Materials
Supplementary data for this article can be accessed here.
Notes
2. The Shanghai Stock Exchange (SSE) is a Chinese stock exchangebased in the city of Shanghai and the largest in mainland China. The current exchange was re-established on November 26, 1990 and was in operation on December 19 of the same year. It is a non-profit organization directly administered by the China Securities Regulatory Commission (CSRC).
3. Cao, Xu, and Cao (Citation2012) discusses the Chinese exchange rate market and stock market using a multifractal detrended cross-correlations method; Nieh and Yau (Citation2010) examine the relationship between SHSE A-share prices and RMB/USD exchange rates using the conventional ECM（Error Correction Model）; Rutledge, Karim, and Li (Citation2014) analyze the relationship between the RMB exchange rate and the stock market with cointegration and a Granger-causality test; Zhao (Citation2010) shows the dynamic dependence between the RMB real effective exchange rate and stock prices with VAR (Vector autoregression) and GARCH (Autoregressive conditional heteroskedasticity model)models.
4. Aloui, Aïssa, and Nguyen (Citation2011), Boako, Omane-Adjepong, and Frimpong (Citation2016), Caporale et al. (Citation2015), Han and Zhou (Citation2017), Lee, Doong, and Chou (Citation2011), Lin (Citation2012), Kamal and Haque (Citation2016), Reboredo, Rivera-Castro, and Ugolini (Citation2016), Sui and Sun (Citation2016), and Wong (Citation2017) among others find an increase in dependence between foreign exchange markets and financial markets.
7. See Ang and Chen (Citation2002), and Raza et al. (Citation2016), which suggest that dependence correlation in financial markets increases in turbulent market conditions.
8. Nguyen and Bhatti (Citation2012), Ghorbel and Trabelsi (Citation2007), and McNeil and Frey (Citation2000) consider the stochastic volatility and fat-tailed nature of most financial return series using extreme value theory.
10. The use of linear correlation to depict the financial market dependence structure has many disadvantages, as noted by Embrechts (Citation1999).
11. Non-linear dependence structures between exchange rates and stock markets are considered by Bahmani-Oskooee and Saha (Citation2018), Chen and Chen (Citation2012), and Ho and Huang (Citation2015).
14. According to official timelines provided by Federal Reserve Board of St Louis (Mankiw, Citation2010) and the Bank for International Settlements (BIS, Citation2009), the timelines are separated into four phases Phase 2 is described as “sharp financial market deterioration” (September 16, 2008, to December 31, 2008) Phase 3 is defined as “macroeconomic.deterioration” (January 1, 2009, to March 31, 2009) We define the turbulent period as from September 16, 2008, to March 31, 2009, so the pre-crisis period is defined as from July 21, 2005, to September 15, 2008, for which we have o768bservations; and the post-crisis period is defined as from April 1, 2009, to December 31, 2017, for which we have 2,056 observations.
Cao, G., L. Xu, and J. Cao. 2012. Multifractal detrended cross-correlations between the Chinese exchange market and stock market. Physica A: Statistical Mechanics and Its Applications 391 (20):4855–66. doi:10.1016/j.physa.2012.05.035. Nieh, C. C., and H. Y. Yau. 2010. The impact of renminbi appreciation on stock prices in China. Emerging Markets Finance and Trade 46 (1):16–26. doi:10.2753/REE1540-496X460102. Rutledge, R. W., K. E. Karim, and C. Li. 2014. A study of the relationship between renminbi exchange rates and Chinese stock prices. International Economic Journal 28 (3):381–403. doi:10.1080/10168737.2014.913652. Zhao, H. 2010. Dynamic relationship between exchange rate and stock price: Evidence from China. Research in International Business and Finance 24 (2):103–12. doi:10.1016/j.ribaf.2009.09.001. Aloui, R., M. S. B. Aïssa, and D. K. Nguyen. 2011. Global financial crisis, extreme interdependences, and contagion effects: The role of economic structure? Journal of Banking & Finance 35 (1):130–41. doi:10.1016/j.jbankfin.2010.07.021. Boako, G., M. Omane-Adjepong, and J. M. Frimpong. 2016. Stock returns and exchange rate nexus in Ghana: A Bayesian quantile regression approach. South African Journal of Economics 84 (1):149–79. doi:10.1111/saje.12096. Caporale, G. M., F. M. Ali, and N. Spagnolo. 2015. Oil price uncertainty and sectoral stock returns in China: A time-varying approach. China Economic Review 34:311–321. doi:10.1016/j.chieco.2014.09.008. Han, Y., and X. Zhou. 2017. The relationship between stock and exchange rates for BRICS countries pre-and post-crisis: A mixed C-VINE copula model. Journal for Economic Forecasting, 20 (1), 38–59. Lee, C. H., S. C. Doong, and P. I. Chou. 2011. Dynamic correlation between stock prices and exchange rates. Applied Financial Economics 21 (11):789–800. doi:10.1080/09603107.2010.537631. Lin, C. H. 2012. The comovement between exchange rates and stock prices in the Asian emerging markets. International Review of Economics & Finance 22 (1):161–72. doi:10.1016/j.iref.2011.09.006. Kamal, J. B., and A. E. Haque. 2016. Dependence between stock market and foreign exchange market in South Asia: A Copula-GARCH approach. Journal Of Developing Areas 50 (1):175–95. doi:10.1353/jda.2016.0010. Reboredo, J. C., M. A. Rivera-Castro, and A. Ugolini. 2016. Downside and upside risk spillovers between exchange rates and stock prices. Journal of Banking & Finance 62:76–96. doi:10.1016/j.jbankfin.2015.10.011. Sui, L., and L. Sun. 2016. Spillover effects between exchange rates and stock prices: Evidence from BRICS around the recent global financial crisis. Research in International Business and Finance 36:459–71. doi:10.1016/j.ribaf.2015.10.011. Wong, H. T. 2017. Real exchange rate returns and real stock price returns. International Review of Economics & Finance 49:340–52. doi:10.1016/j.iref.2017.02.004. Kamal, J. B., and A. E. Haque. 2016. Dependence between stock market and foreign exchange market in South Asia: A Copula-GARCH approach. Journal Of Developing Areas 50 (1):175–95. doi:10.1353/jda.2016.0010. Reboredo, J. C. 2013. Is gold a safe haven or a hedge for the US dollar? Implications for risk management. Journal of Banking & Finance 37 (8):2665–76. doi:10.1016/j.jbankfin.2013.03.020. Reboredo, J. C., and A. Ugolini. 2015. Systemic risk in European sovereign debt markets: A CoVaR-copula approach. Journal of International Money and Finance 51:214–44. doi:10.1016/j.jimonfin.2014.12.002. Cho, J. W., J. H. Choi, T. Kim, and W. Kim. 2016. Flight-to-quality and correlation between currency and stock returns. Journal of Banking & Finance 62:191–212. doi:10.1016/j.jbankfin.2014.09.003. Cho, J. W., J. H. Choi, T. Kim, and W. Kim. 2016. Flight-to-quality and correlation between currency and stock returns. Journal of Banking & Finance 62:191–212. doi:10.1016/j.jbankfin.2014.09.003. Griffin, J. M., F. Nardari, and R. M. Stulz. 2004. Are daily cross-border equity flows pushed or pulled? Review of Economics and Statistics 86 (3):641–57. doi:10.1162/0034653041811725. Reboredo, J. C., M. A. Rivera-Castro, and A. Ugolini. 2016. Downside and upside risk spillovers between exchange rates and stock prices. Journal of Banking & Finance 62:76–96. doi:10.1016/j.jbankfin.2015.10.011. Walid, C., A. Chaker, O. Masood, and J. Fry. 2011. Stock market volatility and exchange rates in emerging countries: A Markov-state switching approach. Emerging Markets Review 12 (3):272–92. doi:10.1016/j.ememar.2011.04.003. Ang, A., and J. Chen. 2002. Asymmetric correlations of equity portfolios. Journal of Financial Economics 63 (3):443–494. doi:10.1016/S0304-405X(02)00068-5. Raza, N., S. J. H. Shahzad, A. K. Tiwari, and M. Shahbaz. 2016. Asymmetric impact of gold, oil prices and their volatilities on stock prices of emerging markets. Resources Policy 49:290–301. doi:10.1016/j.resourpol.2016.06.011. Nguyen, C. C., and M. I. Bhatti. 2012. Copula model dependency between oil prices and stock markets: Evidence from China and Vietnam. Journal of International Financial Markets, Institutions and Money 22 (4):758–773. doi:10.1016/j.intfin.2012.03.004. Ghorbel, A., and A. Trabelsi. 2007. Predictive Performance of Conditional Extreme Value Theory and Conventional Methods in Value at Risk Estimation (No. 3963). Germany: University Library of Munich. McNeil, A. J., and R. Frey. (2000). Estimation of tail-related risk measures for heteroscedastic financial time series: An extreme value approach. Journal of empirical finance, 7(3–4): 271–300. doi:10.1016/S0927-5398(00)00012-8. Lee, H. T., and J. Yoder. 2007. Optimal hedging with a regime‐switching time‐varying correlation GARCH model. Journal of Futures Markets: Futures, Options, and Other Derivative Products 27 (5):495–516. doi:10.1002/fut.20256. Embrechts, P. 1999. Extreme value theory in finance and insurance. Manuscript, Department of Mathematics, ETH, Swiss Federal Technical University. Bahmani-Oskooee, M., and S. Saha. 2018. On the relation between exchange rates and stock prices: A non-linear ARDL approach and asymmetry analysis. Journal of Economics and Finance 42 (1):112–137. doi:10.1007/s12197-017-9388-8. Chen, S. W., and T. C. Chen. 2012. Untangling the non-linear causal nexus between exchange rates and stock prices: New evidence from the OECD countries. Journal of Economic Studies 39 (2):231–59. doi:10.1108/01443581211222671. Ho, L. C., and C. H. Huang. 2015. The nonlinear relationships between stock indexes and exchange rates. Japan and the World Economy 33:20–27. doi:10.1016/j.japwor.2015.02.002. Cho, J. W., J. H. Choi, T. Kim, and W. Kim. 2016. Flight-to-quality and correlation between currency and stock returns. Journal of Banking & Finance 62:191–212. doi:10.1016/j.jbankfin.2014.09.003. Nieh, C. C., and H. Y. Yau. 2010. The impact of renminbi appreciation on stock prices in China. Emerging Markets Finance and Trade 46 (1):16–26. doi:10.2753/REE1540-496X460102. Cho, J. W., J. H. Choi, T. Kim, and W. Kim. 2016. Flight-to-quality and correlation between currency and stock returns. Journal of Banking & Finance 62:191–212. doi:10.1016/j.jbankfin.2014.09.003. Yang, R., X. Li, and T. Zhang. 2014. Analysis of linkage effects among industry sectors in China’s stock market before and after the financial crisis. Physica A: Statistical Mechanics and Its Applications 411:12–20. doi:10.1016/j.physa.2014.05.072. Mankiw, N. G. (2010). Questions about fiscal policy: Implications from the financial crisis of 2008–2009. Federal Reserve Bank of St. Louis Review, 92 (May/June 2010). Borio, C. (2009). 1.3 The macroprudential approach to regulation and supervision. Post-Crisis Banking Regulation, 23. Bahmani-Oskooee, M., and S. Saha. 2018. On the relation between exchange rates and stock prices: A non-linear ARDL approach and asymmetry analysis. Journal of Economics and Finance 42 (1):112–137. doi:10.1007/s12197-017-9388-8. Ehrmann, M., C. Osbat, J. Stráský, and L. Uusküla. 2014. The euro exchange rate during the European sovereign debt crisis–Dancing to its own tune? Journal of International Money and Finance 49:319–39. doi:10.1016/j.jimonfin.2014.06.008. Leung, H., D. Schiereck, and F. Schroeder. 2017. Volatility spillovers and determinants of contagion: Exchange rate and equity markets during crises. Economic Modelling 61:169–80. doi:10.1016/j.econmod.2016.12.011. Lin, C. H. 2012. The comovement between exchange rates and stock prices in the Asian emerging markets. International Review of Economics & Finance 22 (1):161–72. doi:10.1016/j.iref.2011.09.006. Additional information
Funding
This work was supported by the Natural Science Foundation of Hunan Province (project number 2017JJ2215), the Education Planning of Hunan Province (project number XJK016BGD053), the National Social Science Foundation of China (project number 18BTJ032), the National Natural Science Foundation of China (project number 71301166 and 11861042), and Ministry of Education in China Project of Humanities and Social Sciences (project number 13YJC910007).
![Sample our Economics, Finance,Business & Industry journals, sign in here to start your access, latest two full volumes FREE to you for 14 days]({"type":"image" , "src" : "/sda/5931/TOC-Subject-Sample-2021-Economics-Finance-Business-Industry.jpg"})