Estimation on Dynamic Correlations Among Foreign Reserve Growing, Liquidity Shock and Stock Market Fluctuation in China

Since 1995, China´s foreign exchange reserve has been growing rapidly, which brought about liquidity problem significantly and stock market volatility sharply. This paper explores both long-term and short-term dynamic effects on China´s stock market by changes in China´s foreign exchange reserve. Based on a VEC model, empirical results show that, growth of foreign exchange reserve exacerbated stock market volatility. But in the short term, changes in foreign exchange reserve have a reverse effect on stock market, which is great opposite to that situation in the long term.