Studies On RMB Currency Basket Selection

On July 21,2005, China implemented managed floating exchange rate regime based on market supply and demand with reference to exchange rate. The paper focuses on how to construct RMB basket and finds that financial market will have an increasing impact on RMB exchange rate as its openness increases. Therefore, the paper discusses RMB basket in a brand-new view of currency status and stability of basket.The first chapter is a literature survey of studies of currency basket in China, and the weakness of constituting basket in the view of mere goods and service trade is discussed. Then, the paper analysis the importance of international financial market, which is a vital angle to form RMB basket.In Chapter Two, the paper determines the structure of RMB basket in the view of financial market share. First, the importance of security market, foreign exchange market and derivatives market are discussed. Then, using data from BIS, the paper analysis the trade shares of seven major international currencies.In Chapter Three, using vector module model, the paper calculates the weights of these currencies above in RMB basket, and hence get a choice of the structure of RMB basket.In Chapter Four, in view of minimizing risk of basket exchange rate, the paper focuses on another RMB basket choice. Suppose that government be risk averseness and seek the stability of RMB basket, using assets portfolio theory, the paper constructs minimum variance model. In light of international currency' s effective exchange rate index and their fluctuation, using Eviews to cointegration test and Matlab to get the weights of the basket, the paper forms a second structure of RMB basket.In Chapter Five, the above two models are compared by means of simulation the two kinds currency basket using RMB historic data. The fluctuation of basket exchange rates simulated and their deviation from effective exchange rate index are compared.In Chapter Six, the paper concludes with a summary that in determining RMB basket it is necessary to consider financial market, which needs further study to get a better currency basket. It is found that: (1) financial market is a key factor in determining the currency basket; (2) vector module model and minimum variance model are proper ways to construct RMB basket; (3) the effective exchange rate determined by currency basket model is more stable than effective real exchange rate index.