Unraveling the Link Between Federal Reserve Interest Rate Hikes and the Chinese Stock Market

In response to the severe inflation following the COVID-19 pandemic, the Federal Reserve initiated a round of interest rate hikes starting from March 2022. In order to explore the impact of this action by the Federal Reserve on the Chinese stock market, this paper selects data from January 4, 2022, to June 9, 2023, including the US dollar index, Shanghai Composite Index, Shenzhen stock index, and Growth Enterprise Index. A VAR model is utilized to investigate the interrelationships and dynamics among these four variables, and impulse response graphs of the three Chinese stock indices under this shock are plotted. Additionally, an ARMA-GARCH model is established to analyze the heterogeneity of the influence of the sudden fluctuation of the US dollar on the instability of the Chinese stock market. The research indicates that the Federal Reserve’s interest rate adjustments have a negative impact on the Chinese stock market and suggests that policymakers should focus on how to quickly respond to short-term negative effects caused by shocks in order to stabilize the economy, while investors can benefit from stock market volatility and exchange rate fluctuations through reasonable expectations.