The RMB Central Parity Formation Mechanism: August 2015 to December 2016

Yin-Wong Cheung, Cho-Hoi Hui () and Andrew Tsang
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Cho-Hoi Hui: Hong Kong Monetary Authority

No GRU_2018_010, GRU Working Paper Series from City University of Hong Kong, Department of Economics and Finance, Global Research Unit

Abstract: We study the renminbi (RMB) central parity formation mechanism following the August 2015 reform using statistical models. We identify the roles of the onshore and offshore RMB exchange rates and the US dollar index in determining the central parity in a linear regression framework. The effect of the RMB currency basket index, however, is revealed after controlling for multiplicative offshore RMB volatility effects. The offshore RMB volatility exerts a dampening effect on the links between the central parity and its determinants. In the prediction comparison exercise, the three selected models statistically outperform the random walk benchmark. Among these four models, the selected multiplicative specification yields the smallest root-mean squared prediction error and mean absolute prediction error.

Keywords: China’s Exchange Rate Policy; Currency Basket; Multiplicative Interaction Model; Onshore and Offshore RMB Rates; Volatility (search for similar items in EconPapers)
JEL-codes: F31 F33 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2018-06-20
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Published in Journal of International Money and Finance, Vol. 86, September 2018, Pages 223-243

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Journal Article: The RMB central parity formation mechanism: August 2015 to December 2016 (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:cth:wpaper:gru_2018_010

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