Exploration and Prediction of Factors Influencing China’s Foreign Exchange Fluctuations Based on Multiple Linear Regression Model

Singyi Chan ()
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Singyi Chan: Central University of Finance and Economics, Statistics and Mathematics

A chapter in Proceedings of the 2025 3rd International Conference on Digital Economy and Management Science (CDEMS 2025), 2025, pp 634-645 from Springer

Abstract: Abstract As China becomes increasingly globalized, foreign exchange reserves serve as a crucial indicator of economic strength and international standing, thereby shaping economic security, international payment capacity, and financial market stability. However, foreign exchange reserve fluctuations are driven by various macroeconomic factors, necessitating a deeper exploration of their underlying mechanisms. Therefore, the paper aims to explore the key factors affecting the fluctuation of China’s foreign exchange reserves and analyze the impact mechanisms of macroeconomic variables such as money supply, GDP, and interest rates on foreign exchange reserves. In particular, a multiple linear regression model is used for empirical analysis, with standardized macroeconomic indicator frequencies and outlier adjustments to improve model robustness. In addition, a ten-fold cross-validation method is implemented to refine the model, while the ARMA-GARCH model is utilized to predict exchange rate fluctuations for the next year, thus providing deeper insights into market risks. The results demonstrate that at a 0.05 confidence level, the logarithmic broad money supply (ln M2) and exchange rate (ER) exhibit a significant negative influence on foreign exchange reserves (FER), while the China-U.S. CPI difference, treasury bond yield difference (YS), and the logarithm of China’s GDP index do not show statistical significance. Furthermore, the ARMA-GARCH model predicts that the average exchange rate remains around 8.2765 over the next year, while volatility is expected to increase, indicating that despite a stable average exchange rate, market uncertainty and risk may rise.

Keywords: Foreign exchange reserves; exchange rate fluctuations; multiple linear regression; ARMA-GARCH model; market risk (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:advbcp:978-94-6463-770-0_73

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DOI: 10.2991/978-94-6463-770-0_73

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