A Study Of RMB Exchange Rate's Fluctuation After The Exchange Rate Reform

The depreciation and appreciation of a country's exchange rate has an important supporting role in the country's economic development and macro-economic control. The People's Bank of China announced on July 21, 2005 that RMB exchange rate no longer tacked the single US dollar as from today. And the managed floating exchange rate system came into force based on the market's supply and demand and adjusted according to a basket of currencies. The exchange rate reform will definitely have a significant impact on RMB exchange rate's trend, central government's macro-economic control, China's economic development and people's life. This paper will briefly answer the question of RMB exchange rate's fluctuation characteristics under the new exchange rate system.The thesis uses the co-integration theory to analyze the correlation between RMB exchange rate and other active exchange rates in the world. The ARCH models are also employed to examine the RMB exchange rate's fluctuation characteristics. Both these two chapters use samples before and after the exchange rate reform and the test results are also compared. A fractal study is then conducted on the return of RMB exchange rate after the reform. Lastly, the thesis gives a few suggestions about the exchange rate reform based on the main conclusions obtained from the empirical analyses, and looks into the future of RMB exchange rate system.Following are the main conclusions from the empirical study: The correlation between RMB and other active currencies' exchange rates has increased to some degree after the exchange rate reform, but not obvious. RMB exchange rate has long-term equilibrium relations with 3 other currencies' exchange rates. The return of RMB exchange rate has a characteristic of fluctuation clustering, does not comply with the normal distribution and has an obvious peak and fat tails. RMB exchange rate has a quicker response to information after the reform. The return has neither a characteristic of leverage effect nor a risk premium effect. The exchange rate series after the reform manifests the fractal distribution of anti-continuity instead of random walk.