Correlation of RMB Exchange Rates and Industrial Stock Indexes based on Granger Causality Test

This study's objective is to solve the dynamic linkages and mechanism problem between exchange rates and stock prices. This paper examines the relationship between RMB-Dollar exchange rates and 5 market indexes and 19 industrial indexes of China stock market by cointegration test and Granger Causality test. The empirical results show a significant long-term equilibrium between stock prices and exchange rates, Granger Causality test shows the causal relation from exchange rates to stock prices with a lag of 2 or 3 days. Besides, the main channels of the influence are found, they are Tenement, IT, Finance, Metal, Lignum, Farming and woods, Wholesale and retail and Delicatessen Industries. These findings support the flow oriented model, provide evidence of developing countries for the argument, rind the dynamic linkages and mechanism between exchange rates and stock prices and suggest the government to consider the influence on China's immature stock market resulted from exchange rate and convertibility of RMB when setting down the exchange rate policy.