The empirical analysis of the RMB appreciation’s effect on Shanghai composite index

[Abstract] The article begins with the theory. comprehensiving the stock prices pricing model, The net export function, the J-curve, and the BP-curve indicates that the appreciation of the RMB will affect the stock market prices. Then we collected data of the exchange rate of the RMB and the Shanghai composite index from July 21, 2005 to April 30, 2007. Through data stationarity test, cointegration regression test, and causality test we get that the exchange rate will affect the stock market, that is the fluctuations in the exchange rate will effect the stock market and stock price changes do not affect the foreign exchange market. We establish a dynamic model(ARDL) on the above result. The model indicated that the share price on one day main decided by the stock price of one day before and the exchange rate price of three days before. Then we make a predict with the model, the forecast of in-sample is good and the forecast of out-of-sample have a larger deviations. Finally we do a ARCH effects test on the ARDL model. The result is the model exist ARCH effect, then we set up a model of ARCH and the GARCH(1,1) model.