Spillover Effect in the RMB Foreign Exchange Market: Based on VAR and DCC-MVGARCH Models

Abstract

This paper analyzes the stability and marketization of the RMB exchange rate after China introduced the foreign exchange rate reform by linking the RMB exchange rate with the offshore and onshore markets on August 11, 2015 (“8/11”). Under the framework of dynamic analysis, through Granger causality test, VAR model and DCC-MVGARCH model, the empirical analysis is conducted about the three market exchange rate linkages of CNY, NDF and CNH from May 2012 to December 2018. Then, the direction and degree of the linkage between the RMB's offshore and onshore exchange rates before and after the“8/11” exchange rate reform are compared. The research results show that: (1) since the “8/11”exchange rate reform, the RMB exchange rate has become more flexible; (2) the price-determining power of the RMB exchange rate may be weakened, and policy adjustment should take effect; and (3) the prerequisites, under which the offshore market can play a role, are the development of the market itself. This paper proposes that: (1) the onshore and offshore markets should develop in a collaborative manner to further increase exchange rate elasticity and flexibility; (2) close attention should be paid to the relationship between the offshore and onshore markets, and policy determination and flexibility should be maintained; and (3) the offshore market should be improved and play a due role.

Keywords

“8/11”exchange rate reform, offshore market, onshore market, exchange rate linkage VAR model, DCC-MVGARCH model

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