Public information arrival, price discovery and dynamic correlations in the Chinese renminbi markets

Kin-Yip Ho, Yanlin Shi and Zhaoyong Zhang

The North American Journal of Economics and Finance, 2018, vol. 46, issue C, 168-186

Abstract: The Chinese renminbi (RMB) currency system has undergone several major developments in the past two decades, including the adoption of a managed floating system since July 2005, the expansion of an offshore RMB non-deliverable forward (NDF) market, and the relaxation of certain regulatory controls to promote the increased use of the RMB in the region. These developments have sparked intense debate on the potential of RMB internationalization and its pros and cons. In view of these developments, this paper provides a comprehensive analysis of the dynamics of the RMB in both the spot and NDF markets since 2005 by examining the role and significance of the RMB NDF in the price discovery process and in predicting the volatility dynamics of the RMB markets. The results indicate that asymmetric volatility effects are significant for several NDF contract maturities and the spot-NDF correlations are significantly time-varying. Moreover, shocks to the volatility levels are highly persistent. Causality tests on the spot and NDF volatilities further suggest that the NDF markets impact the future fluctuations of the spot market, but the spot market does not have predictive power for the volatility of the NDF markets. Public information flows are found to have a significantly positive impact on the spot-forward conditional correlations. These findings have important implications for market linkages and effective hedging strategies.

Keywords: Chinese renminbi; Price discovery; Volatility; Forward markets (search for similar items in EconPapers)
JEL-codes: C22 F31 G15 O24 O53 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:46:y:2018:i:c:p:168-186

DOI: 10.1016/j.najef.2018.04.005

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