Research On The Correlations Between Offshore And Onshore RMB Exchange Rates

With the depth of RMB internationalization,and the announcement in November 2015 from International Monetary Fund that RMB was added in the SDRs' basket of currencies,the rennminbi has become one of the world's main reserve currency,and the status of RMB in the international market has been increasing.Currently more than 50 foreign central banks or monetary authorities hold financial assets denominated in Chinese yuan and add RMB into the foreign exchange reserves.In 2016,RMB trading volume accounts for 2%of global trading volume,ranking from seventeenth in 2010 jumped to eighth,most of which are traded in RMB offshore foreign exchange market.The rapid growth of RMB offshore exchange market has brought far-reaching influence on the development of economy of China,and onshore exchange rate and exchange rate policies are affected more and more by the offshore RMB exchange rate.It is on this background and situation that this paper explores the correlation of the RMB exchange rate between onshore and offshore foreign exchange markets,in order to find the rules of relationship and influence between the onshore and offshore exchange rate each other,to set an example to the future research,to provide a theoretical basis for the foreign exchange market traders,and to offer the beneficial enlightenment to regulators and policymakers of our country.Starting from analyzing the development characteristics of both onshore and RMB offshore foreign exchange market,and the links mechanism between the two markets,which is the foundation of correlations of onshore and offshore exchange rates,this paper studies the pricing mechanism of exchange rates and exchange rate system in two different markets that result in different exchange rate determination basis.Furtherly,heterogeneous investors that describe investor diversity in onshore and offshore markets and herding effect that eventuates in the links among the two markets,are imported.And exchange rate determination models-heterogeneous investors herding model-are deduced,which is a theoretical foundation for the further empirical research.A VECM-DCC-GARCH model established,furthermore,this paper analyzes carefully and deeply the dynamic and long-term interactions of RMB spot and forward exchange rates between onshore and offshore,and of effective exchange rates and offshore RMB exchange rate,with kinds of methods such as comparison and segmentation method,the cross correlation coefficient,Granger causality test,variance decomposition,and mutational test.In order to investigate the interdependency of the RMB exchange rates between onshore and offshore effected by internal and external factors,disparities of exchange rates in onshore and offshore are involved.The results of the study demonstrate that there exist significant dynamic and long-term correlations between onshore RMB exchange rate and offshore exchange rate,especially significant forecast guidance influence on the offshore RMB exchange rate from both RMB onshore exchange rate and the effective exchange rate,in which no arbitrage interval with the threshold regression model is set and quantitative multiple regression models are applied.Detailedly,the prediction ability of NDF exchange rate reveals stronger than the DF exchange rate on the spot exchange rate.Both the risk preferences divergences of the investors and the disparities of two interest rates in the onshore and offshore markets are the main factors that impact of the spot exchange rates deviated from each other;the spot exchange rate is more sensitive to changes in the differences of stock markets in the two markets.The main reasons for the forward rates deviated from each other come from the difference in stock markets and foreign exchange intervention index;the deviation of forward rates is more sensitive to the differences of market risk preference of investors.Besides,the international financial market volatilities are the significant external causes that lead to the deviations of spot and forward rate from each other.When a shock erupts in the international financial market,the divergences of the exchange rates indicate a tendency to expand.From the political efficiency,the "8.11" exchange rate reform in 2015 significantly affects the correlations of onshore and offshore exchange rates,and enhances the degree of marketization of onshore RMB exchange rate.This paper consists of four parts.The first part,the first chapter,includes the study background,literature reviews,definitions of concepts,research framework and innovation.The second part,the second and the third chapter involved,theoretically analyzes the foundations of formation mechanism and correlation of RMB onshore and offshore exchange rates.The third part is the empirical part,comprising chapters from four to seven,in which the quantitative analysis about correlations of and the internal and external influence on the RMB onshore and offshore exchange rates are involved.The fourth part concludes this paper and gives relevant policy suggestions and future research directions.