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Fluctuation and reform: A tale of two RMB markets

Yousha Liang, Kang Shi (), Lisheng Wang and Juanyi Xu

China Economic Review, 2019, vol. 53, issue C, 30-52

Abstract: The framework of “one currency, two markets” makes China’s currency market quite unique compared to its Western counterparts. In this study, we characterize the linkage between the onshore and offshore Renminbi exchange rates, and estimate the effect of the recent Renminbi market reforms against the backdrop of Renminbi internationalization. Using GARCH-type models, we find robust evidence of the volatility clustering phenomenon and the leverage effect in the pricing differential between the onshore and offshore exchange rates. We also find that the recent Renminbi currency market reforms all increase the volatility of the pricing differential between the two Renminbi markets, while these reforms are proved to either enlarge or shrink the pricing differential.

Keywords: Renminbi markets; CNH and CNY exchange rate; Pricing differential; Volatility; Currency market reform; GARCH-type model (search for similar items in EconPapers)
JEL-codes: C22 F31 F33 G15 G28 (search for similar items in EconPapers)
Date: 2019
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