Study on the relevance of money supply and stock price in China

In this paper, a novel time series analysis is used to study the relationship between money supply and stock price in Chinese financial market. Data from Jun. 1997 to Dec. 2011 is chosen as stationary serials for ADF test and divided to two phases. Causal relevance of data is retrieved throng Granger Causality Test, then VAR model is established, and finally impulse response is analyzed. The results demonstrate that stock price variations have a significant impact on the money supply, and the extents of impact on M0, M1 and M2 are quite different. On the other hand, the impact of money supply variation on the stock price is not significant. Therefore, stock price should be an important consideration for monetary supply regulation. In addition, as money supply is a less significant factor to stock price in Chinese stock market, stock price is mainly determined by its own endogenous factors.