Bivariate Causality between RMB Exchange Rate and Stock Price in

Abstract: After the reform of RMB exchange rate mechanism in 2005, the RMB exchange rate is appreciating gradually, and the stock price in China are also increasing contemporarily. On the one hand, the appreciation of RMB exchange rate stimulates the increase of share prices of banks, airline companies and the whole stock price index. On the other hand, stock price may influence exchange rate since investors ’ wealth and money demand may depend on the performance of the stock market. This paper investigates the interrelations between exchange rates and stock market performances in China. Using various testing methods, including cointegration test, Granger causality test and impulse response analysis, our study reveals that the existence of short-run, bivariate causality between RMB exchange rate and A-share stock index. This bivariate causality does not exist between RMB exchange rate and B-share stock index. Key word: RMB exchange rate Stock price Bivariate causalit