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Study the RMB Forward Exchange Rates between Onshore Market and Offshore Market Base on Interest Rate Parity Theory

Author: HuHaiLong
Tutor: WangYang
School: Jiangxi University of Finance
Course: Finance
Keywords: Forward (NDF) Granger causality VAR (m)-MGARCH-BEKK model
CLC: F832.6
Type: Master's thesis
Year: 2009
Downloads: 135
Quote: 1
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Abstract


July 21, 2005, the People's Bank of China announced China began to implement based on market supply and demand with reference to a basket of currencies, a managed floating exchange rate system. August 15, 2005, the People's Bank of China to establish the inter-bank foreign exchange forward market, the initial formation of a representative domestic RMB forward exchange rate. In early 2006, the People's Bank of China, the market maker system introduced into the inter-bank foreign exchange forward market, improve the pricing mechanism of RMB forward. At the same time, the offshore market in Hong Kong, Singapore and other transactions RMB non-deliverable forwards (NDF) market has further active forward on China's RMB spot foreign exchange market and the domestic inter-bank foreign exchange market also produced more big impact, so that the State Administration of Foreign Exchange announced on October 20, 2006, to prohibit domestic institutions to participate in the RMB NDF business, RMB forward pricing is sidelined, and thus become the focus of attention. January 4, 2007, the People's Bank of China officially launched the Shanghai Interbank Offered Rate (Shibor), China's market-oriented interest rate reform entered a new stage. With the gradual progress of China's reform of the RMB exchange rate system supporting measures, the relationship between the RMB forward pricing mechanism inside and outside the study period, and both inside and outside the RMB forward exchange market has important theoretical and practical significance . In this context, the paper selected January 4, 2007 to 2009 RMB spot exchange rate, inside and outside of the one-month and one-year RMB forward exchange rates, as well as the one-month and one-year period Shanghai inter-bank the RMB interbank offered rate and the London interbank interbank offered rate, a more comprehensive and systematic analysis and study the relationship between the forward exchange rate of RMB spot exchange rate and domestic and foreign RMB. Firstly, use cointegration theory and error correction model to study the inside and outside of the one-month and one-year yuan forward pricing mechanism, then, on this basis, the use of the Granger causality test and VAR (m)-MGARCH-BEKK (1 , 1) model spillovers between RMB spot market and the domestic and overseas RMB forward market prices and volatility spillovers study. The empirical results show that: in a relatively short period (one month), whether it is the the renminbi forwards in the domestic inter-bank foreign exchange market or offshore RMB no deliverable forward market is basically pricing basis of interest rate parity theory. In a longer period of time (one year), whether it is the the renminbi forwards in the domestic inter-bank foreign exchange market or offshore RMB non-deliverable forward market is basically not based on the interest rate parity theory as the basis of pricing, and more by long-term appreciation of the yuan the expected impact. Inside and outside the RMB forward market pricing mechanism is not obvious difference there are significant differences, but the shorter period (month) and longer term (one-year) RMB forward pricing mechanism, the cause of this difference , on the one hand, with the advance of China's exchange rate reform and interest rate market, interest rate parity theory premise assumed in our country has been basically satisfied, on the other hand, with the rapid growth of our country over the past decade continued double-account surpluses and foreign exchange reserves The RMB facing significant sustained appreciation pressure, and thus the one-month and one-year yuan forward pricing basis of performance to differ materially. The flow of information in the overflow returns between the inside and outside the RMB forward exchange market, whether it is a one-month or one-year offshore renminbi no deliverable forward foreign exchange market on the renminbi forwards in the domestic inter-bank foreign exchange market showing a clear one-way return spillover effect the the RMB forward pricing a certain extent, there has been sidelined. However, in terms of the flow of information between the inside and outside the RMB forward exchange market volatility spillover, one-month and one-year performance was exactly the opposite, in a month period, overseas offshore RMB forward in the domestic inter-bank foreign exchange market RMB non-deliverable forward foreign exchange market showing unidirectional volatility spillovers in the one-year offshore renminbi no deliverable forward foreign exchange market on the the renminbi forwards in the domestic inter-bank foreign exchange market were shown obvious unidirectional volatility spillovers. The difference in volatility spillovers are likely to be differences inside and outside of the one-month and one-year RMB forward exchange market pricing mechanism caused. Domestic RMB forward market is limited by its market size can not afford to guide offshore renminbi non-deliverable forward market price changes, but of offshore offshore renminbi non-deliverable forward market stability still has a certain the impact. Of Chinese financial institutions to participate in the NDF market transactions restrictive policies contribute to the stability of the RMB exchange rate, and enhance the ability of the RMB market pricing, but it is not a long-term solution. Therefore, the government needs to further strengthen the construction of the onshore RMB forward market, as much as possible inside and outside the forward market channel. Accelerate the innovation of the domestic foreign exchange derivative products business, especially to actively establish domestic RMB futures market, fostering efficient and attractive in the domestic market, has far-reaching implications for the future of the RMB exchange rate pricing power to master.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Exchange rate,foreign financial relations
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