Econometrical Analysis On The Volatility Characteristics For RMB Exchange Rate

Exchange rate is the precondition for international trading and capital flow betweendifferent countries, it also is the bridge linking economic exchange for each country, so exchangevolatility will have certain affect to each county’s economy. Exchange volatility has bettertimeliness and sensitivity for economic volatility and international financial risk, change in fieldwill lead to risk exposure. Study of volatility features for exchange rate can lets us to know thelaw of the change for exchange rate, so that the shock from exchange rate volatility to economycan be defused. In reverse, change in economy can also cause shock to field volatility ofexchange rate, and affect the volatility features of exchange rate. Managed floating exchangesystem is adopted in our country, and the fluctuation range is released to bigger, so that the RMBexchange rate volatility become more flexible, which guarantee the stability of foreign trade andcapital flows. Therefore, on the basis of studying equilibrium exchange rate and exchange ratetransmission mechanism, analysis of the volatility features and quantitative methods forexchange rate deeply can be used as the theory support supplied for marketization reform deeplyof China’s exchange rate.In this article, on the basis of exchange rate decision theory and studiesof scholars at home and abroad for exchange rate volatility problems, we will analyze thedistribution features of exchange volatility, the effect of RMB exchange rate to china and USeconomies, the common volatility spillover effect and common volatility persistence betweenRMB/US, RMB/GBP and other exchange rates.First, transmission mechanism from exchange rate volatility to economy will be analyzeddeeply, which contains exchange rate to price level, trading condition, FDI, employment, interestrate and so on. In which, the transmission to price level include direct and indirect transmissioneffects. Change in exchange rate will affect the price of import and export commodities directly,then the volatility of price will transmit to domestic commodities prices by production and trade,so that affect change of the whole countries’ price level, but the price transmission is notcomplete. Transmission from exchange rate to trading is mainly contains two aspects:1) exchange rate change will affect the international competitiveness through price mechanism;2)the risk brought by volatility will affect the export and import by affecting decision of the exportmanufacturer.Theory of transmission from exchange rate to FDI mainly has “Relative cost-effectivenessand “relative treasure effect”. Exchange rate is the link of trade between countries, so exchangeis not only has effect to domestic economy, it also affect other country’s economy, Dynamiccorrelation between exchange rate and fundamental economic variables is always focused on.Inthis article, based on “Model learning method” to describe the problems. Empirical study turnsout: the dynamic relationship between RMB/US exchange rate and fundamental economicvariables vary in different volatility horizon. At the beginning of the first exchange rate reform,the exchange rate is mainly affected by output gas and interest rate differential. During thefinancial crisis, our country peg dollar softly with low volatility, the influence factors are morethan before. After the second exchange rate reform, the whole world’s and our country’seconomic structure has changed, all variables in model affect the variation of the exchange rate.Second, on the basis of studying multiple GARCH model deeply, we focus on how toextend the multiple GARCH model based on Normal distribution to multiple GARCH based onGED, Volatility features of exchange rate mainly contains high kurtosis fat tail, volatilitycluster, long memory and persistence, leverage effect, mean reversion and volatility spill overeffect, and so on. At the same time, we will describe the volatility models, such as GARCHmodel based on Normal, student t distribution and GED, SV model and Markov Regimeswitching Models. We use binary N-GARCH and GED-GARCH models to analyze the SpilloverEffects between Exchange Rate and Interest Rate before and after financial crisis separately, andthen we evaluate the two models by Adaptive mean absolute deviation and adaptive root of meansquare error criterion. As a result, we think the forecasting effect of binary GED-GARCH isbetter, and we conclude from this model that there is no Spillover Effects between ExchangeRate and Interest Rate before financial crisis, but after financial crisis, there are two-waySpillover Effects between them.Third, volatility spillover effect and common volatility spillover for RMB exchange ratesare studied. On on side, Vector Multiplicative Error Model （VMEM） is used to study theexchange rate volatility spillover effects between China, Japan and South Korea. Empiricalanalysis results indicate: the real effective exchange rates for China, Japan is not only affected bytheir own fluctuation and return in last term, but also have significant leverage. For volatility ofSouth Korea, it is affected by its fluctuation and return in last term, there is no significantleverage, there are mutual volatility spillover effects between China and Japan, Japan and South Korea exchange rate markets. There is no volatility spillover effect from China to South Korea，but has volatility spillover effect from South Korea to China. At last, there is no mutual leverageeffect between exchange rate markets. On the other side, I measure common volatility spilloverfrom some exchange rate markets to one by introducing ICA method into GARCH models.Empirical evidences show that,1) if volatilities of HKD, JPY, EUR and GBP are taken as asystem to measure the common volatility spillover to USD, there is volatility spillover fromHKD to USD only.2) We can avoid high volatility risk by investing USD, EUR and GBP.3)EUR and GBP tend to be influenced by other exchange rate markets.4) There are no volatilityspillovers from other exchange rate markets to JPY/CNY because of the particularity of Japaneseeconomy.At last, the volatility persistence and common persistence for RMB exchange rates has beenstudied deeply. By analysis, we find the RMB/US exchange has both mean and variance longmemory, then RMB to EUR, GBP, AUD, CAD and JPY exchange rates’ volatility persistenceand common persistence have been economically analysis, we find the persistence of other nonRMB/US exchange rate is stronger than RMB/US exchange rate, I think the main reason isExchange rate of RMB to other money is cross-rate through RMB/US, persistence degree is theintegration of two exchange rates, so it show stronger persistence. Reference to theCo-integration theory, I analyze the common persistence for other exchange rates except forRMB/US by economical method, then I find, there are common persistence between otherexchange rate, namely, each exchange rate is persistent, but several exchange rates integratedshow up non-persistent, or weak persistent. In which, the RMB/EUR and RMB/JPY is have themost co-persistent. The result has important meaning for portfolio decisions of exchange rate.