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Interest rate parity theory Empirical Test in China :2006 -2008

Author: CaoZhiPeng
Tutor: HuangShaoAn
School: Shandong University
Course: Finance
Keywords: Interest rate parity theory RMB exchange rate Forward rate SHIOR
CLC: F822.0;F224
Type: Master's thesis
Year: 2008
Downloads: 510
Quote: 2
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Abstract

Interest rate parity theory (Interest Rate Parity Theory), also known as the forward rate theory (ForwardExchange Theory), is about the interest rates, spot and forward rates between theory, reflecting the relationship between the three mutual influence . Interest rate parity theory through the perspective of liquidity describes the relationship between exchange rates and interest rates, and often is used as a basic relationship while other rates used in the theory of the analysis. Western scholars have many years ago, to verify the usefulness of this theory to analyze the interest rate and the exchange rate between the conduction process, but for the interest rate parity theory or not established in different countries come to different conclusions. China also has many scholars for the usefulness of the theory of RMB have been studied and put forward policy recommendations. Such as ginger Polk, Zhao Hua, Wang Ai inspection and other well-known scholars from different angles on the relationship between interest rates and exchange rates, or select different periods of data for this theory are empirically tested in China. Firstly, an explanation of the relevant concepts and then details the interest rate parity theory different stages of development thinking and its assessed. In the succession of interest rate parity theory has been based on the results, the use of empirical methods to verify this theory from 2006 October to play in March 2008 the RMB exchange rate practicality. This paper selects the RMB against the U.S. dollar, euro and sterling at the spot as well as a month and three month forward rate, as well as the currency in January and 3-month LIBOR rate and the yuan SHIOR interest rates, respectively, of the territory of RMB Yuan the exchange of market spreads and spreads were descriptive analysis, and the RMB exchange forward market territory spreads and spreads between the regression tests and analysis, as well as the territory of the RMB forward market, respectively, the exchange differences, spreads and transaction costs between the regression test analysis. And come in like ours in countries where exchange controls, interest rate parity theory elusive conclusion. RMB against the U.S. dollar in January and March of goodness of fit of the data than the yuan against the euro, the pound is relatively large, the introduction of transaction cost factors, the two terms of the fit of the data model to improve access to a large extent , but still can not achieve the goal requirements. In this theory combined with previous scholars have studied on the basis of results of the analysis to find out the cause of this theory is difficult to realize that the central bank to stabilize the exchange rate as policy objectives, resulting in the RMB exchange rate changes on the foreign exchange supply and demand inflexible exchange rate appreciation amplitude is limited to less volatility, the RMB exchange rate can not be fully realized in an instant appreciation of the RMB exchange rate formation in the market expected to be devalued, the level of domestic interest rates to offset the increase in the formation of risk-reward, and market conditions, restrictions on international capital flows, interest rate and exchange rate relatively rigid control strong causes such as interest rate and exchange rate between the conduction mechanism is not perfect. Finally, on the above analysis, based on the improvement of China's financial market and enhance market efficiency, coordination and other aspects of interest rate policy put forward some proposals, such as gradually promote the RMB capital account liberalization; steadily promote market-oriented interest; relax the yuan exchange rate volatility: increase foreign exchange market depth, breadth and openness. And that with the deepening of the financial system and the further opening of China's foreign exchange controls, the Theory in China will greatly enhance the usefulness will become RMB forward exchange market rates at good pricing and forecasting tools.

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CLC: > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods
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