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Dynamic relationship between RMB exchange rate index and stock market liquidity: A new perspective based on MF-DCCA

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  • Li, Wei
  • Lu, Xinsheng
  • Ren, Yongping
  • Zhou, Ying

Abstract

Using multifractal detrended cross-correlation analysis (MF-DCCA), this research investigates the dynamic relationship between the RMB exchange index and the liquidity of the Shanghai and Shenzhen stock market during the period from 22 June 2010 to 17 February 2017. As suggested by our empirical results, the well-known efficient market hypothesis by no means explains the dynamics between the RMB index and stock market liquidity. Indeed, the RMB index and stock market liquidity are cross-correlated, and the cross-correlations exhibit multifractal features. Further, cross-correlations between the RMB index and the liquidity of the Shanghai and Shenzhen stock market demonstrate strong and positive persistence. In particular, the positive persistence of cross-correlations is strengthened in the presence of a tightening monetary policy.

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  • Li, Wei & Lu, Xinsheng & Ren, Yongping & Zhou, Ying, 2018. "Dynamic relationship between RMB exchange rate index and stock market liquidity: A new perspective based on MF-DCCA," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 508(C), pages 726-739.
    • Handle: RePEc:eee:phsmap:v:508:y:2018:i:c:p:726-739
    DOI: 10.1016/j.physa.2018.05.097
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