The Time-varying Impact of the European Central Bank's Interest Rate Policy on China's Stock Market

Abstract

To curb the inflation, the European Central Bank (ECB) said to raise interest rate, which is the biggest since the physical euro currency was introduced in 2002. Depending on some studies, monetary events, such as increasing interest rate, may have spillover effects on stock markets, as well as impact on returns of stock markets. In order to figure out the correlation between Euro appreciation and the performance of Chinese stocks, the article constructs VAR model based on Euro Index (EI), Shanghai Securities Composite Index (SSEC), and Shenzhen Securities Component Index (SZSE). Furthermore, the article constructs ARMA-GARCH model based on volatilities of SSEC and SZSE, introducing volatility of EI as external explanatory variable. The article finds that the impact of Euro appreciation on the return rate of SSCE and SZSE will show positive and negative alternating results in the future, while the net impact is positive. Moreover, from the empirical result of GARCH model, the volatility spillovers of EI on SSEC and SZSE are confirmed.