Abstract:
The economic activities of a nation are measured through various macroeconomic factors
such as GDP, EXIM rate, unemployment level, Wholesale Price Index (WPI), and Consumer
Price Index (CPI). Numerous studies have focused on identifying the association between
inflation and stock prices, with some also highlighting the relationship between gold prices
and stock price volatility. This study uses exchange rate and balance of trade as indicators to
predict stock price volatility in China. The stock price volatility is measured using the
Shanghai Stock Exchange Composite Index (SSE Composite Index). An analytical method is
employed to evaluate the involved variables, with Johansen integration used to determine the
relationships between them. The Vector Error Correction Model (VECM) is utilized to model
these relationships. The Granger causality test and Johansen co-integration test measure the
causal relationships of economic variables on the stock market indices. The findings indicate
that the exchange rate positively influences stock prices, whereas the balance of trade shows
a negative relationship. The exchange rate Granger-causes stock prices, but the reverse is
not true. A similar Granger-causing relationship exists between the balance of trade and
stock prices. The study also reveals that while the exchange rate of RMB to USD may not
have a strong impact on stock prices, the exchange rates of other currencies may
significantly influence China's stock prices.
