Onshore spot and offshore forward markets for RMB: Evidence from the “8.11” exchange rate regime reform

This paper investigates the dynamic relationship between the onshore spot market and offshore forward market for Chinese currency around the period of China's “8.11” exchange rate regime reform, one of the most important market-oriented reforms implemented on August 11, 2015. We compare return and volatility spillover effects between the two markets before and after the “8.11” reform. The empirical evidence shows that a remarkable change has occurred in both the return and volatility spillovers. Before the reform, return and volatility spillovers exist from the offshore forward market to the onshore spot market. After the reform, however, we observe an obvious reverse in the direction and an increase in the strength of the return and volatility spillover effects. These findings suggest the existence of cross-market information flows, a change in the direction and a strengthening of the dynamic relationship after the reform. We argue that the “8.11” reform serves as a milestone reflecting long-term underlying forces that increase the relative importance of the onshore market.     

Fluctuation and reform: A tale of two RMB markets

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.     

Assessing the price dynamics of onshore and offshore RMB markets: An ITS model approach

This paper investigates how the price dynamics of both onshore and offshore RMB markets are affected by fundamental determinants, market liquidity, global risk aversion and policies by using daily data from August 2010 to February 2016. The interval time series (ITS) modelling is applied to study the RMB price mechanism by capturing prices of the two markets as one self-formed interval data. An interval-based Wald test is constructed to examine the differences between the coefficients and an interval-based Mallows criterion is proposed for choosing appropriate explanatory variables. We find that both the price level and the price differences of onshore and offshore RMB markets are greatly affected by economic fundamentals indicated by different returns on stock indexes and market liquidity indicated by bid-ask prices of offshore market price. In addition, it is suggested that the interest rate spread between China and the US and the global risk appetite do not significantly affect the RMB price for both onshore and offshore markets. Finally, the results imply that “811 reform” of the RMB exchange rate regime does not change the fundamental price dynamics of RMB markets, but significantly changes how economic fundamentals affect the price mechanism of RMB exchange rate.     

Mean‐reverting and Asymmetric Volatility Switching Properties of Stock Price Index,Exchange Rate and Foreign Capital in Taiwan*

The main purpose of the present study is to explore the relationships among stock price index, exchange rate and foreign capital in Taiwan and to detect whether the mean‐reverting and asymmetric volatility switching properties exist in these markets. The multivariate asymmetric nonlinear smooth transition generalized autoregressive conditional heteroskedastic in mean model is used in this study. The empirical results indicate that overbuy and oversell rates of foreign capital influence the movements of the stock price index and the exchange rate. All three conditional means exhibit asymmetric mean‐reverting behavior, with negative returns reverting quicker than positive returns in terms of both speed and magnitude. The empirical results also demonstrate that the conditional heteroskedasticities of these markets are asymmetric, generating different volatility persistence under a prior positive and negative return shock.     

Examining Volatility Persistence and News Asymmetry in Soybeans Futures Returns

Four alternative generalized autoregressive conditional heteroscedasticity (GARCH), and three asymmetric GARCH models (EGARCH, TGARCH and APARCH) are used to examine the presence of volatility persistence and news asymmetry in soybeans futures data. Presence of fat tails in the data series resulted in applying Student’s-t and generalized error distributions in addition to Gaussian normal distribution. The results reveal that soybean return series exhibit volatility characteristics typical of a financial time series. The findings of this study indicate that the leverage effect was absent for soybeans suggesting that positive news causes more volatility to the commodity than negative news. Results further suggest that the fit of the GARCH models is improved by applying t-distribution errors. The diagnostic tests reveal that GARCH models are correctly specified and among all the competing models, APARCH (1,3) model with t-distribution performed best in capturing the volatility.     

人民币离岸市场与在岸市场汇率的动态相关性研究

论文主要检验了人民币在岸市场(CNY)与香港人民币离岸市场(CNH)以及人民币无本金交割远期外汇市场(NDF)之间汇率波动性的动态相关关系。根据人民币离岸市场发展的标志性事件将样本区间分为四段,采用日度数据,利用DCC-MVGARCH模型研究三个市场日汇率数据之间的动态相关关系,研究结果发现:三个市场相关程度不断增强,信息传递较快;2009年7月1日前CNY市场与CNH市场汇率波动率的相关系数较低且规律性不强;2009年7月2日至2010年7月19日,受国际金融危机的影响,人民币汇率稳定不再升值,其相关系数接近于0;2010年7月20日至2011年6月27日汇率波动性的相关性逐渐增强,表明人民币国际化的影响逐渐加大。2011年6月28日至2012年12月24日间汇率波动的相关性显著增强,这说明人民币不同市场之间的信息溢出程度加强,境内外市场融合程度不断提高。     

MACROECONOMIC UNCERTAINTY AND CONDITIONAL STOCK MARKET VOLATILITY IN SOUTH AFRICA*

This paper analyses how systematic risk emanating from the macroeconomy is transmitted into stock market volatility using augmented autoregressive Generalised Autoregressive Conditional Heteroscedastic (AR‐GARCH) and vector autoregression (VAR) models. Also examined is whether the relationship between the two is bidirectional. By imposing dummies for the 1997‐1998 Asian and the 2007‐2009 sub‐prime financial crises, the study further analyses whether financial crises affect the relationship between macroeconomic uncertainty and stock market volatility. The findings show that macroeconomic uncertainty significantly influences stock market volatility. Although volatilities in inflation, the gold price and the oil price seem to play a role, it is found that volatility in short‐term interest rates and exchange rates are the most important, suggesting that South African domestic financial markets are increasingly becoming interdependent. Finally, the results show that financial crises increase volatility in the stock market and in most macroeconomic variables, and, by so doing, strengthen the effects of changes in macroeconomic variables on the stock market.     

汇改后人民币汇率波动特性的实证分析

文章采用GARCH族模型对2005年7月人民币汇率形成机制改革后人民币汇率的波动性进行了研究,发现人民币兑主要货币汇率的日收益率均具有典型的金融时间序列尖峰厚尾的统计特征,且除人民币／日元汇率外,对其它主要货币的名义汇率均存在波动聚集效应。文章认为,由于我国外汇市场仍然不够完善,具有一定的投机性,人民币汇率变化因此具有一定的群体行为性而表现出波动的聚集效应,中央银行应采取灵活干预的策略,把握汇率制度改革的节奏。     

Spillover across sovereign bond markets between the US and ASEAN4 economies

This study employs the VAR-MGARCH model to investigate the spillover across the sovereign bond markets between the US and ASEAN4 economies. The empirical results confirm the unidirectional spillover in bond return from the US to ASEAN4, while there is a bidirectional influence in volatility. Additionally, dynamic conditional correlation (DCC) analysis is employed to depict the changing correlation in volatility. The empirical results also show that the yields of ASEAN4 bonds increase with emerging market risks, and the exchange rate can act as a buffer to reduce spillover. Given that ASEAN4 governments have issued a large number of government bonds to finance their large fiscal spending during the ongoing COVID-19 pandemic, the return and volatility spillovers from the US to ASEAN4 could be important factors to consider when the US unwinds its unconventional monetary policy and normalizes its interest rates in the medium to long term.     

Effects of the Bank of Japan's intervention on yen/dollar exchange rate volatility

This paper examines the effects of the Bank of Japan's (BOJ) intervention on the volatility as well as the level of the yen/dollar exchange rate. Specifically, the conventional GARCH model proposed by Bollerslev [Bollerslev, T., 1986. Generalized autoregressive conditional heteroskedasticity. J. Econometrics 31, 307–327] and the component GARCH model proposed by Engle and Lee [Engle, R.F., Lee, G.G.J., 1999. A long-run and short-run component model of stock return volatility. In: Engle, R., White, H. (Eds.), Cointegration, Causality and Forecasting. Oxford Univ. Press, Oxford, UK, pp. 475–497], where the volatility consists of short-run and long-run components, are estimated using the BOJ's and the Federal Reserve system's (Fed's) official intervention data. Results based on the component GARCH model provide new evidence on the effects of the BOJ's intervention on the volatility of the yen/dollar exchange rate. The BOJ's intervention only reduces the short-run volatility component from the late 1990s to 2003, while it does not have an impact on volatility (both the short- and long-run volatilities) at all in the early 1990s. The stabilizing effect of the BOJ's intervention in the late 1990s and the first few years of the 2000s is not enhanced by the Fed's coordinated intervention. J. Japanese Int. Economies 20 (1) (2006) 99–111.     

Are Offshore RMB Arrangements the Basis for a Long-term Exchange Rate System without Convertibility？

This paper discusses China's relatively new structure of dual onshore and offshore RMB markets. Its distinguishing feature is both offshore trading at exchange rates that are market determined and onshore trading at exchange rates anchored at the official spot rate with capital account inconvertibility. We note that thus far the CNH and CNY spot rates have largely tracked each other, suggesting that the shadow price on the convertibility constraint onshore and also the offshore diversification benefit is close to zero. However, this could change in the future. We discuss the potential for the offshore RMB market to grow with trade settlement and bilateral swap arrangements in RMB, which would provide a big enough pool of liquidity for the RMB to become a vehicle currency and reserve currency. These potential developments will be restrained by onshore inconvertibility, but moving to convertibility seemingly implies major change in China's financial structure and the offshore RMB arrangements are only a small first step along this path. Crucial in this evolution of arrangements will be future Chinese growth performance and the relative attractiveness of onshore inconvertible but offshore marketable RMB relative to the debt laden and slow growth currencies of the USA, the EU and Japan.     

Renminbi Derivatives： Recent Development and Issues

This study reviews the developments in the onshore and offshore renminbi derivatives markets. The onshore market has seen a rapid build‐up in the market infrastructure and price discovery mechanism in the past year, with empirical evidence suggesting that its pricing is increasingly determined by financial fundamentals, such as the covered interest rate parity. However, the growth of the market has been restrained by restrictions on the participant base, limited variations in the RMB/US$ exchange rate, market participants’lack of technical capacity and experience, and inadequate supporting financial market infrastructure. The non‐deliverable forward (NDF) market, concentrated in Hong Kong and Singapore, is more developed, but has the drawback that its pricing is not tied to financial fundamentals. The comparison between onshore and offshore markets suggests that two issues are of particular importance for future derivatives market development in China: the balance between regulation and development, and the relationship between onshore and offshore markets.     

境内外金融市场联动效应：理论基础与文献综述

狭义金融市场联动效应是指不同金融资产的价格及其收益率和波动率之间的协动关系。本文从理论角度分析了金融市场联动效应的作用机制,对境内外金融市场联动效应方面的研究文献进行了评述,特别是境外上市交易的本土概念外汇、利率、股票衍生品市场与境内对应金融市场之间的联动效应,并据此提出一些政策建议以及未来研究方向建议。     

RISK–RETURN TRADE‐OFF AND BEHAVIOUR OF VOLATILITY ON THE SOUTH AFRICAN STOCK MARKET: EVIDENCE FROM BOTH AGGREGATE AND DISAGGREGATE DATA

The study analyses the nature and behaviour of volatility, the risk–return relationship and the long‐term trend of volatility on the South African equity markets using aggregate level, industrial level and sectoral level daily data for the period 1995‐2009. By employing dummy variables for the Asian and the sub‐prime financial crises and the 11 September political shock, the study further examines whether the long‐term trend of volatility structurally breaks during financial crises and major political shocks. Three time‐varying generalised autoregressive conditional heteroskedasticity models were employed: one of them symmetric, and the other two asymmetric. Each of these models was estimated based on three error distributional assumptions. The findings of the study are as follows: First, volatility is largely persistent and asymmetric. Second, risk at both aggregate and disaggregate level is generally not a priced factor on the South Africa (SA) stock market. Third, the threshold autoregressive conditional heteroscedasticity (TARCH) model under the generalised error distribution is the most appropriate model for conditional volatility of the SA stock market. Fourth, volatility generally increases over time, and its trend structurally breaks during financial crises and major global shocks. The policy and investment implications of the findings are outlined.     

LONG MEMORY IN SOUTHERN AFRICAN STOCK MARKETS

The paper examines long memory in equity returns and volatility for stock markets in Botswana, South Africa and Zimbabwe using the ARFIMA‐FIGARCH model in order to assess the efficiency of these markets in processing information. The findings are diverse. Significant long memory is demonstrated in the equity returns of Botswana; while, in South Africa this result is not statistically different from zero. For Zimbabwe returns are characterised by an anti‐persistent process. Furthermore, all the markets investigated provide evidence of long memory in volatility with the exception of Botswana where there is no evidence of volatility persistence and hence the return from taking risk in this market cannot be predicted on the basis of previous values.     

Volatility and Volume in Chinese Stock Markets

The fact that stock market returns in Europe and the USA are characterised by conditional heteroscedasticity is by now well documented in a large literature. We address the question of whether the same is true of the four Chinese stock markets (Shanghai and Shenzhen A and B) over the period from 25 November 1994 to 27 April 2001. Using daily index data, we make two departures from the standard GARCH(1,1) model. First, we use exponential GARCH (EGARCH) to allow for asymmetry in the volatility, which may be present as a result of leverage effects. Second, we respond to evidence of two-way causality between volume and return (and return volatility) by introducing a simultaneous equation model of the relationship. The results of estimating the model indicate that asymmetry does not seem to be present to a significant degree, possibly as a result of lack of information or concern among Chinese investors. We find that volume appears to play a significant part in determining index volatility, which may reflect information arrival effects or may alternatively result from the direct impact of trading on volatility. At the same time, we also find that both the level of returns and their conditional variance have an impact on trade volume, probably because positive (negative) returns tend to attract (deter) investors into the markets.     

Cointegration and causality among the onshore and offshore markets for China's currency

China has taken steps to develop offshore markets for renminbi trading and to liberalize exchange-rate determination in its onshore market. We examine the interaction between onshore and offshore markets with attention to how the interaction has been affected by widening of the onshore trading band first in April 2012 and further in March 2014. Ties between the onshore and offshore markets were closest before the first band widening and steadily loosened thereafter. We further study the cointegration and lead-lag effects between offshore and onshore spot and forward markets and show that there is a long-term equilibrium relationship between any pair of them. Our results suggest stronger causality running from the spot onshore rate to the spot offshore rate than vice versa. Between the spot and forward markets, there is evidence of bidirectional linear and nonlinear causality, which implies foreign impulses have had an influence on the domestic market.     

Equity Risk Premium Puzzle: Evidence from Indonesia and Sri Lanka

This paper investigates the equity risk premium puzzle in the Indonesian and Sri Lankan stock markets in order to identify the relationship between the volatility of excess returns and the equity risk premium. The asymmetric impact of negative shocks on the equity risk premium is also examined using threshold and exponential GARCH-M models. We analyse data on the excess returns of the Indonesian and Sri Lankan stock markets from 2004 to 2013, and we find that the impact of the conditional volatility of excess returns on the equity risk premium is not significant in either country. Instead, we find an impact from negative return shocks on the equity risk premium only in Sri Lanka. Therefore, we conclude that investors are not compensated for the conditional volatility of the excess returns in these two markets, while Sri Lankan investors are compensated for the risk of negative shocks.     

Exchange rate movements in emerging economies - Global vs regional factors in Asia

The aim of this article is to analyse the main determinants of emerging markets' exchange rate movements, particularly in Asia. For this purpose, we implement a dynamic latent factor model to investigate the drivers of 24 emerging countries' exchange rate movements and decompose the patterns into three components: a global common factor, a regional factor and a country-specific factor. Our results reveal that, in the whole period of 2000–2015, the common global factor is by far the most important determinant of exchange rate variations for Asian economies and, albeit to a lesser extent, for Latin America. However, after 2005, there is a strong increase in the explanatory power of the regional factor in Asia, from 5.6% to 45.1%, and to 49.7% in the period of 2011–2015, which shows that it is becoming the dominant factor in this area. Then, we use a Vector Autoregressive (VAR) model and an Autoregressive Distributed Lag (ARDL) model to show that the regional factor in Asia, estimated from the dynamic latent factor model, is mainly explained by Chinese economic variables. More particularly, our results highlight that the bilateral exchange rate of China, both the onshore and the offshore rates, and the macroeconomic climate in China greatly influence the regional factor in Asia in the long-run. These results give some evidence of a Renminbi zone in the long-run and are robust to the inclusion of two other major currencies in Asia, the Japanese Yen and the Korean Won, notably in the long run.     

Volatility Spillovers between the Equity Market and Foreign Exchange Market in South Africa in the 1995‐2010 Period

This paper attempts to assess the extent of volatility spillovers between the equity market and the foreign exchange market in South Africa. Multistep family of the General Autoregressive Conditional Heteroskedasticity models are used for this end, whereby volatility shocks obtained from the mean equation estimation in each market are included in the conditional volatility of the other market, respectively. The paper selects the appropriate volatility models for each market following criteria such as covariance stationarity, persistence in variance and leverage effects. The finding of the paper indicates that there is a unidirectional relationship in terms of volatility spillovers from the equity market to the foreign exchange market. The paper supports the view that the extent of foreign participation in the South African equity market possibly contributes to this phenomenon.