Empirical Study of Relations between Stock Returns and Exchange Rate Fluctuations in China

The existing theories tell Lis that there exist interaction relations between stock prices and exchange rates. However, empirical research results don't always support these theories. This paper uses quantile regression techniques to check whether the above theories hold in Chinese markets. We first eliminate the impact of the calendar effect and the time trends on stock market returns and exchange rate fluctuations using Gallant, Rossi, and Tachen's method (1992) by combination with stepwise regression method, and then do quantile regression analysis according to the adjusted data. The empirical results are summarized as follows: the influences of exchange rate fluctuations to stock returns are negative at most quantiles of stock returns; the opposite influences are not significant at most quantiles of exchange rate fluctuations. Some explanations according to these results are given.