The Risk Contagion Effect of Return Volatility between China’s Offshore and Onshore Foreign Exchange Market

Zhaosu Meng (), Kedong Yin (), Yan Zhang and Xun Dong
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Zhaosu Meng: Department of Finance, College of Economics, Ocean University of China, Qingdao, China.
Kedong Yin: Department of Finance, College of Economics, and Ocean Development Research Institute, Major Research Base of Humanities and Social Sciences of Ministry of Education, Ocean University of China, Qingdao, China.
Yan Zhang: Department of Finance, College of Economics, Ocean University of China, Qingdao, China.
Xun Dong: Department of Finance, College of Economics, Ocean University of China, Qingdao, China.

Journal for Economic Forecasting, 2017, issue 4, 5-21

Abstract: The main objective of the paper is to study the risk contagion effect of return volatility between China’s offshore and onshore foreign exchange market. Based on the formation mechanism of offshore RMB, we divide the offshore RMB exchange rate indices into three stages. The VAR model is applied to analyze the impact direction, extent and duration of the return volatility. GARCH-Granger overall risk contagion model and Contagion-MGARCH time-varying risk contagion model are applied for the static and dynamic analysis on the risk transmition between the offshore and onshore markets. The empirical conclusions are as follows: the direction and the extent of the risk contagion effect of return volatility between China's offshore and onshore foreign exchange market.is quite different as time varys. The transmission channels of financial risks between the offshore and onshore markets vary in the different stages. Among all three stages, offshore foreign market has a significant contagion effect to the onshore foreign exchange market. Compared with the overall contagion studies, the time-varying method shows a more intuitive and dynamic process of risk contagion effect. The results provide a reference for the construction of the offshore RMB financial market in the internationalization process.

Keywords: risk contagion effect; impulse response; VAR model; overall contagion model; time-varying contagion model (search for similar items in EconPapers)
JEL-codes: F31 F41 G15 G21 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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