The Dynamic Interrelation And Pricing Power Among RMB Spot, On-shore And Off-shore Forward Markets

The development and influence of offshore RMB derivatives, with NDF as a representative one, is one of the most attended problems by State Administration of Foreign Exchange of China. As the rapid development of international integration of financial markets, the relationship among RMB spot market, onshore forward market, offshore NDF market and other derivatives markets is becoming closer more and more. Especially, along with the improvement of onshore spot and forward market, the leading right and pricing power or RMB exchange rate among the three markets is increasingly becoming the hot topic and debating focus about RMB exchange rate stability and financial security of China. How to disclose and understand the dynamic interrelation and pricing power ownership has been turned into the very concerned problem of investors and administrators.Based on interest rate parity theory, efficient markets hypothesis, the achievements and empirical experience of the forerunners, the research roundly displays the actual dynamic information conduction process and the price discovery mechanism among the three markets by daily data of four more liquid contracts from linear and nonlinear point of views at the same time, using the unit roots test and co-integration test of non-stationary time series, Granger causality tests, vector error correction model, multivariate GARCH model, common factor model and information share model of price discovery and so on. The evidence suggests that although there are volatility spillover effects from the spot to the NDF market, owing to the restrictions of onshore markets the NDF market is the center of market price information and the most powerful in leading market price among the three markets. Further more, based on the discussion of the empirical findings and the analysis of the impact factors, together with the NDF experience of Australian and Korean as reference, related policy implications for the improvement of onshore forward market and reply strategies for the challenge of the offshore NDF market have been put forward.In conclusion, taking the pricing power ownership of RMB exchange rate as the core, the dynamic interrelationships among three markets are systematically studied through academic and empirical methods according to the basic situations of development in onshore/offshore markets. There will be positive theoretic worth and practical significance for supervisory departments and trading makers.