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The effectiveness of the monetary policy in China: New evidence from long-range cross-correlation analysis and the components of multifractality

Jing Qin, Jintian Ge and Xinsheng Lu

Physica A: Statistical Mechanics and its Applications, 2018, vol. 506, issue C, 1026-1037

Abstract: This study examines the long-range cross-correlations between the Chinese Renminbi (RMB) exchange rate and the Shanghai Interbank Offered Rate (Shibor) markets both on qualitative and quantitative basis, using a comprehensive dataset covering the period from October 8, 2006 to September 30, 2016. Our empirical results suggest that a nonlinear time-varying correlation exists between the markets. We also verify that the third stage of China’s monetary policy reform from 2011 to 2016 had a greater influence on both small and large foreign exchange (FX) market fluctuations. Using the multifractality analysis, we conclude that China’s monetary policy can significantly reduce the multifractality of cross-correlations between the RMB exchange rate and Shibor rate markets, and that market efficiency in the third stage of policy reform is improved. Furthermore, the source of multifractality of cross-correlations is found mostly in the nonlinear correlation and fat-tailed probability distribution (PDF) components.

Keywords: Multifractality; Market efficiency; Long-range cross-correlation; Monetary policy (search for similar items in EconPapers)
Date: 2018
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