The Relationship Between Stock Returns and Volatility

The purpose of this paper is to investigate the relationship between RMB exchange rate and A-share stock returns in China, in particular in Shanghai stock market. We find that both stock returns and RMB nominal exchange rate are integrated of order 1. The Engle–Granger cointegration test is then performed, suggesting that there is not a long-run equilibrium relationship between stock returns and RMB exchange rates at 5 % significance level. However, there is strong evidence suggesting that there is a short-run uni-directional causality relationship from the nominal exchange rate to the stock returns