Impact of exchange rate regime reform on asset returns in China

Hua, Xiuping; Sun, Laixiang; Wang, Tianyi

Abstract

Employing monthly data over the period 1999–2010, this paper examines the impact of China’s exchange rate regime reform in July 2005 on three major asset markets: house, land, and stocks. We test whether the reform, which switches from a fixed exchange rate regime to a managed floating one, has brought forward structural changes to asset return dynamics. The results suggest that the exchange rate regime switch exerted the most significant impact on house and land returns at the national level, in terms of both returns and their volatilities. In contrast, its impact on China’s stock market was moderate, with no structural change being detected in its returns and only weak structural change being found in the dynamics of its volatility. We also find that in comparison with other popular explanatory variables, broad money supply and inflation have the largest explanatory power on housing and land returns in China after the policy reform.

Citation

Hua, X., Sun, L., & Wang, T. (2015). Impact of exchange rate regime reform on asset returns in China. European Journal of Finance, 21(2), 147-171. https://doi.org/10.1080/1351847X.2013.838183

• Journal Article Type: Article
• Publication Date: Jan 1, 2015
• Deposit Date: Sep 30, 2013
• Journal: European Journal of Finance
• Print ISSN: 1351-847X
• Electronic ISSN: 1466-4364
• Publisher: Taylor and Francis Group
• Peer Reviewed: Peer Reviewed
• Volume: 21
• Issue: 2
• Pages: 147-171
• DOI: https://doi.org/10.1080/1351847X.2013.838183
• Keywords: exchange rate regime; asset returns; structural break; broad money supply; China
• Publisher URL: http://www.tandfonline.com/doi/full/10.1080/1351847X.2013.838183