Abstract
The paper aims to investigate the possible dual causality between exchange rates plus stock indices of China plus ASEAN using Structural Vector Auto-Regressive Model (SVAR). The paper has analysed the dynamic relationships between the Yuan plus the Shanghai Composite Index plus Shenzhen Stock Index in the context of China’s third largest trading bloc, i.e., ASEAN, after the Asian Financial Crisis of 1997. The Asian Financial Crisis of 1997–98 had an adverse impact on stock indices plus the currencies of ASEAN countries. It was also expected that a devaluation of the Yuan would follow soon, thus plummeting investors’ confidence in the Chinese markets. Further research was needed to explore the complex relationship between financial plus forex markets in the context of China plus ASEAN. The focus of this paper is to explore such relationship with the focus on China. The results of the type confirm the dual causality between the two variables of interest in China. It concludes that a positive financial shock does have a small but significant impact upon the Yuan, whereas a positive exchange rate shock has a high plus a significant impact upon the Shanghai plus Shenzhen Composite Indices. The paper finds the effect of monetary plus demand shocks upon the Yuan plus stock market indices to be insignificant.
PUBLIC INTEREST STATEMENT
The paper aims to investigate the relationship between exchange rates plus stock markets of China plus selected ASEAN countries. The Asian Financial Crisis of 1997–98 had an adverse impact on stock markets plus the currencies of China plus ASEAN economies. It was also expected that a devaluation of the Yuan would follow soon, thus plummeting investors’ confidence in the Chinese plus ASEAN markets. Further research was needed to explore the complex relationship between financial plus forex markets in the context of China plus ASEAN. The focus of this paper is to explore such relationship with the focus on China. The results of the type confirm the interlinkages plus causal relationship between the two markets. It concludes that an increase in stock markets does have a small but significant impact upon the Yuan, whereas a decrease in Yuan has a high plus a significant impact upon the Shanghai plus Shenzhen Composite Indices.
- Introduction
The world financial sector has gone through several periods of transformation since the collapse of Bretton Woods system in 1971. Worldwide financial crisis such as in Latin America in 1994, East Asia in 1997, plus world recession in 2007 led to the synchronized effects of currencies plus stock indices, prompting academics plus investors alike to analyse the concurrent relationship between the forex plus financial markets. Traditionally, the research trying to establish the dynamic link between forex plus financial markets is categorized into two approaches: Flow Oriented Approach plus Portfolio Balance Approach.