The relationships between Shanghai stock market and CNY/USD exchange rate: New evidence based on cross-correlation analysis, structural cointegration and nonlinear causality test

This paper explores the co-movement of Shanghai stock market and China Yuan (CNY) exchange rates. First, we find that stock price and exchange rate are significantly cross-correlated. Second, employing a cointegration test allowing for a structural break, we find that the Shanghai Composite Index (SCI) is not cointegrated with the exchange rate of CNY/USD. The so-called “cointegration” found in previous studies is just caused by the shock of the recent financial crisis. Third, using linear and nonlinear Granger causality tests, we find no causality between stock prices and exchange rates during the period before the recent financial crisis. After the financial crisis, a unidirectional causality behavior running from exchange rates to stock index is present.