Spillover Effects Between Exchange Rate and Stock Market: Evidence from China and the United States

Xinyi Xu

doi:10.62051/ijgem.v4n2.18

Authors

Xinyi Xu

DOI:

https://doi.org/10.62051/ijgem.v4n2.18

Keywords:

Stock Return, the Exchange Market, Spillover Effects

Abstract

This study explores the spillover effects between exchange rates and stock markets in China and the United States, with a focus on both mean and volatility spillovers. Using a Vector Autoregression (VAR) model, this study analyzes daily data from August 2015 to December 2022, distinguishing between a stable period and the COVID-19 crisis phase. The findings reveal that the U.S. stock market has a significant mean spillover effect on the exchange rate return, whereas the impact of the Chinese stock market on the exchange rate return is weaker and only significant in crisis phase. In terms of volatility, both U.S. and Chinese stock markets exhibit strong volatility spillover effects with the exchange rate market, with increased significance during the crisis period. A cross-industry comparison shows that the mean spillover effects and predictive power of domestic-oriented stock indices in China and U.S. are comparable to those of export-oriented indices, indicating that the spillovers between the exchange and stock markets in China and the United States is mainly driven by the capital account rather than trade flows. This study underscores the significant influence of the U.S. stock market on exchange rates and highlights the importance of historical data and market dynamics in understanding global financial interconnectedness.

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