A Study of the Causal Relationship between Real Exchange Rate of Renminbi and Hong Kong Stock Market Index


This paper attempts to study whether the real exchange rate of Renminbi and stock market index in Hong Kong are related to each other or not. The study uses cointegration and Granger causality tests on the monthly data of the real exchange rate of Renmnibi (RMB) in terms of Hong Kong dollars (REX) and Hang Seng Index (HSI) since the foreign exchange reform of China in July 2005. The major findings of the study are a) the cointegration test shows that there exists a long-run equilibrium relationship between REX and HSI; b) the error correction mechanism further evidences that there is an error correction between REX and HSI in the short run; c) the Granger causality test indicates that there is causal direction from RMB to HSI but not vice versa.

Share and Cite:

W. LEE, "A Study of the Causal Relationship between Real Exchange Rate of Renminbi and Hong Kong Stock Market Index," Modern Economy, Vol. 3 No. 5, 2012, pp. 563-566. doi: 10.4236/me.2012.35074.

Conflicts of Interest

The authors declare no conflicts of interest.


[1] R. Dornbusch, and S. Fisher, “Exchange Rates and the Current Account,” American Economic Review, Vol. 70, No. 5, 1980, pp. 644-547.
[2] R. Aggarwal, “Exchange Rates and Stock Prices: A Study of US Capital Markets under Floating Exchange Rates,” Akron Business and Economic Review, Vol. 12, 1981, pp. 7-12.
[3] C. W. J. Granger, B. Huang and C. W. Yang, “A Bivariate Causality between Stock Prices and Exchange Rates: Evidence from Recent Asian Flu,” Quarterly Review of Economics and Finance, Vol. 40, No. 3, 2000, pp. 337-354. doi:10.1016/S1062-9769(00)00042-9
[4] H. Y. Yue, W. W. Cheng, W. C. Lee and K. K. Man, “Interaction between Foreign Exchange Rate and Stock Market Price Index in East Asian Economies: A Panel Data Analysis,” 2012 Shanghai International Conference on Social Science, Shanghai, 14-17 August 2012, p.
[5] C. W. J. Granger and P. Newbold, “Spu-rious Regression in Econometrics,” Journal of Econometrics, Vol. 2, No. 2, 1974, pp. 111-120. doi:10.1016/0304-4076(74)90034-7
[6] D. A. Dickey and W. A. Fuller, “Distribution of the Estimators for Autoregressive Time Series with a Unit Root,” Journal of the American Statis-tical Association, Vol. 74, No. 366, 1979, pp. 427-431.
[7] R. Engle and C. W. J. Granger, “Cointegration and Error Correction: Representation, Estimate, and Testing,” Econometrica, Vol. 55, No. 2, 1987, pp. 251-276. doi:10.2307/1913236
[8] C. W. J. Granger, “Investigating Causal Relations by Econometric Models and Cross-Spectral Methods,” Econometrica, Vol. 37, No. 3, 1969, pp. 424-438. doi:10.2307/1912791

Copyright © 2020 by authors and Scientific Research Publishing Inc.

Creative Commons License

This work and the related PDF file are licensed under a Creative Commons Attribution 4.0 International License.