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Macroeconomic determinants of the long-term correlation between stock and exchange rate markets in China: A DCC-MIDAS-X approach considering structural breaks

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  • Xiong, Youlin
  • Shen, Jun
  • Yoon, Seong-Min
  • Dong, Xiyong

Abstract

Owing to the liberalisation of financial markets, the impact of international capital flows on the Chinese stock market has become substantial. This study investigates the effects of economic policy uncertainty (EPU), geopolitical risk (GPR), consumer sentiment (CCI), macroeconomic fundamentals (MECI), and money supply (M2) on the correlations between the stock and exchange rate markets. The negative correlation between these two markets has become more pronounced in recent years. Moreover, EPU, GPR, CCI, and MECI negatively impact long-term stock-exchange rate correlations, while M2 has a positive impact. Portfolios of stock-exchange rates effectively reduce risk, especially when considering structural breaks.

Suggested Citation

  • Xiong, Youlin & Shen, Jun & Yoon, Seong-Min & Dong, Xiyong, 2024. "Macroeconomic determinants of the long-term correlation between stock and exchange rate markets in China: A DCC-MIDAS-X approach considering structural breaks," Finance Research Letters, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:finlet:v:61:y:2024:i:c:s1544612324000503
    DOI: 10.1016/j.frl.2024.105020
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    More about this item

    Keywords

    Stock market; Exchange rate; Structural break; Hedging effectiveness; DCC-MIDAS-X;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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