A Study On Spillover Effect And Price Discovery Of RMB Spot And Forward Exchange Rates

With the formation of Hong Kong Renminbi deliverable forward exchange market, three main different forward exchange rates, including domestic inter-bank forward rate, off-shore Non-Deliverable Forward rate and Hong Kong deliverable forward rate coexist in RMB forward exchange market since the second half of2010. The fact that three forward exchange rates coexistence makes the relationship of the spot rate and the forward rates more and more complex, and the question which rate leads the trend of the exchange rates is also confusing.In order to clarify the relationship between spot rate and forward rates, the paper tests on the weak-form market efficiency of exchange market with wild bootstrape variance ratio method firstly. The result shows that Renminbi foreign exchange market is still not weak-form efficient. To quantify the relationship and price discovery of spot rate and forward rates under the non-effective environment, the paper studies price spillover effect, volatility spillover effect and the dynamic condition correlation and the price discovery of the four rates.Since exchange markets are evolving and changing after September2010, the paper chooses late September2011as a reference mutation time point to divides the time into two intervals at the beginning, then chooses the difference of maximum value and the minimum value of the rates as a threshold to establish threshold VAR model (TVAR model). By establishing threshold VAR model, the paper locates the regime transition of the four rates, and then captures the main regime for further study. What we have done ensures the accuracy of further analysis and also filters the sub-important information.Price Spillover effect studies the mutual relationship of the four exchange rates based on the first moment with Granger casulity test,vector error correction model and impluse response function. The results shows that the advantage of the non-deliverable forward market in the first interval is obvious, while the domestic market and the Hong Kong deliverable forward market replace the advantage of the non-deliverable forward market gradually in the second interval. Volatility spillover effect and dynamic conditional correlation study the mutual relationship of the four exchange rates based on the second moment using extend generalized DCC-GARCH model. The results show that: the fluctuation of Hong Kong deliverable forward rate is more intense than domestic exchange rates all the time while the fluctuation of non-deliverable forward rate reduced severity at the second interval; volatility spillover effects of the spot rate and the forward rate increase in the second phase. Dynamic conditional correlation estimation results show that the correlation between Hong Kong deliverable forward market and domestic market continues to improve at the first interval; and the correlation between non-deliverable market and domestic exchange markets reduce at the second interval. To quantify each market’s contribution of price discovery, the paper implies the modified information share model to measure the price discovery contribution of the four markets. The results show that at the first stage, non-deliverable forward market has the highest price discovery contribution; the information share of Hong Kong deliverable forward market improves and at the second phase its information share has gone beyond the non-deliverable forward market and showing the peak contribution of price discovery.Overall, the guide power of Hong Kong deliverable forward market has increased since September2010, and rises to the first postion after September2011, but its leading edge is not obvious. Besides, the volatility of Hong Kong market is relatively intense. Therefore, whether Hong Kong deliverable forward market can really play a central role of the exchange rate or not still need follow-up observation. The power of domestic exchange market gradually increased, indicating that the exchange rate formation mechanism reform has achieved some improve. However, the information commutation between onshore and offshore exchange market is still not smooth.In short, since Renminbi exchange rate formation mechanism reform has not been completed, our government should make full use of the opportunity of Renminbi internationalization to accelerate the development of domestic forward market and Hong Kong deliverable forward market, gradually relax the regulation of the domestic investors’ wading into the offshore non-deliveralbe market, and establish the free channels between the onshore and offshore foreign exchange markets, strengthen the relevant market monitoring and early warning, make the price discovery function of the RMB forward effectively.