RMB Exchange Rate Adaptive Modeling And Forecasting

To develop an outstanding Renminbi exchange rate forecasting model based on the background of Renminbi internationalization and the increased two-way volatility becomes much more important.By developing the Multivariable Local Adaptive Algorithm,we do the out-of-sample forecasting for the Renminbi exchange rates after 01/2011 and compare the forecasting accuracy with the other 20 different competitive models.We find that the forecasting ability of a parameter model depends not only on whether it is correctly specified but also on the efficiency of whether it can detect the structure changes and using the effective observations to estimate the parameters and also the on the ability of selecting the proper covariates that can be used in forecasting.In order to solve these required problems,we have developed the Multiplier Adaptive Rolling Window Selection Algorithm that can manage of capturing the parameters' time-varying properties and significantly outperform the Random Walk,Purchasing Power Parity model,Flexible Price Monetary Model,Interest Rate Parity Model,Taylor Rule Model,The Taylor Rule Differential Model,The nonlinear Taylor Rule Model,The Threshold Vector Error Correction Model,The Baysian Threshold Vector Error Correction Model,The Score-Driven Dynamic Models With Mixed-Data Sampling Model,The Nonparametric Optimal Window Selection Algorithm,The Random Forest Model,The Neural Network Model,The Dynamic Model Averaging Model,EWA Machine Learning Method,SRidge Machine Laerning Method,The local adaptive model and the Markov regime switching models in varies of exchange rate predictions.We have also developed the Penalize Adaptive Method(PAM)with can adaptively select the covariates and detect the structure changes.The developed model can outperform the multiplier adaptive method and the other methods that mentioned above in exchange rate predictions.In the USD against RMB exchange rate regime,we find out that our newly developed methods can manage of increasing the forecasting accuracy in MAE arrange from 20%to 30%compared with the second-best model.We also find that after the "811" exchange rate reforming,the economic fundamentals will be significantly improved in determining the exchange rate expectation.By constructing the longest homogeneous intervals,we can also find that before the "811”exchange rate reform,investors care more about the middle and the long run risk,but after "811" exchange rate reform,investors care more about the short-term risk.Which can also be concluded as that,after the "811" exchange rate reform,RMB are become more sensitive to the exogenous sharks.Among these fundamentals the difference between interest rate plays the most important role in shifting the exchange rate.To stabilize the RMB exchange rate,government should firstly focus on stabilizing the interest rate difference.Secondly,to stabilize the real income of the whole country,the last thing is to stabilize the inflation of the country.By using the new modeling methods,we can predicate the direction changes of RMB better than the other models.In the direction prediction,the adaptive modeling can reduce the forecasting error from 18%to 50%which means that the adaptive modeling can have practical values in the real word forecasting.Moreover,after 2011,the exchange rate of USD against RMB itself does not decide alone by itself.It is also decided heavily(nearly 37%)by the other currencies' exchange rates such as JPY,GBP and JPY against RMB.The manageable floating exchange rate system is also crucial in preventing the exchange rate risk.If we foucus only on the currency side,based on the results of PAM,we have found that in Asia,the USD is still dominanting among the other currencies,but the importance in determing the SDR value of a non-SDR basket currency is decrasing because of the extrusion from RMB which has already became the“Anchor Currency”in Asia.Moreover,the RMB related policies are able to influence the whole world exchange rate market after 2015.To prevent the risk of RMB is important in preventing the whole world exchange rate risk.