Research Of The Relationship Between Domestic And Off-shore RMB Forex Market

Along with the globalization of world economy, the wave of financial innovation and internationalization has swept the world. As China's currency RMB could not be exchanged freely yet, many foreign companies in China require financial products to offset their loss resulted from the change of exchange rate. That's why the market of RMB NDF (Non-Delivery Forward) is developing so fast. With the development of communication technology and financial liberalization, the information communication between foreign and domestic market is getting faster and faster while the trading cost is getting lower and lower. This paper implements cointegration theory and VAR-BEKK model in studying the relationship between domestic/foreign RMB market rates and the volatility spillovers.We divide our work of data analysis into two parts: before and after July 21st, 2005, on which day the new policy of RMB exchange rate was taken into effect. Firstly, this paper analyzes the theory model and influence mechanism between domestic RMB forex market and off-shore RMB forex market, as well as the cause mechanism of the volatility spillovers. Secondly, JB statistics and Q LB statistics are introduced to analyze the domestic forex market and off-shore forex return serials. Then cointegration test and Granger causality test is implemented in the empirical study on their relationship. Thirdly, the LM test is used to test the ARCH effect of residual serial. Finally, with the VAR-BEKK model, this paper makes an empirical analysis on the volatility spillovers effect between domestic RMB forex market and off-shore RMB forex market. This paper also gives some proposals for the improvement of our nation's exchange rate policy.Statistics show that there is a significant cointegration relationship between domestic RMB forex market and off-shore RMB forex market. Before the reform of exchange rate system, the RMB NDF is the single-directional guide to spot rate and the foreign RMB NDF market is sensitive to the information which influences the RMB exchange rate. After the reform of exchange rate system, there is a bi-directional Granger causality relationship between spot rate and NDF. The single-directional guide is changed into interaction. The dissymmetry of volatility spillovers between foreign and domestic RMB rate shows the existence of information communication between foreign and domestic RMB markets. However, the directions of short term and medium term volatility spillovers are different from each other due to the conduction mechanism. Before the reform of exchange rate system, there are continuous bi-directional volatility spillovers between domestic RMB market and short-term foreign RMB market (one month NDF); while the volatility spillovers effect between domestic RMB market and middle-long term foreign RMB market is not so obvious. After the reform of exchange system, domestic RMB market has great single-directional volatility spillovers influence to the short-term foreign RMB market. Meanwhile, bi-directional volatility spillovers still exist between middle and long term foreign RMB market. The studies mentioned above are significant to collocate asset portfolios and prevent financial risks.