Research On Effect Of The Exchange Reform On The Efficiency Of Foreign Exchange Market In China

People’s Bank of China implemented the floating exchange rate system based on supply and demand of a market and adjusted by referring to a basket of currency on July,21,2005. The foreign exchange market has made many achievements from the reform of exchange rate in China since five years ago, the marketization improved continuously, the range of volatility extended gradually, the trading of derivatives always increased. However, China’s foreign exchange market is still imperfect comparing with the international mature market. In particular, the exchange rate reform, the exchange rate between RMB and dollar showed fluctuate appreciation after the reform, and it reflects the lower efficiency of the foreign exchange market.From the point of exchange rate reform in2005, this dissertation studies the major currencies of the foreign exchange market such as RMB against dollar, euro and Japanese yen respectively and analyzes the efficiency of foreign exchange market before and after the reform in China by using the wave theory and fractal theory.The article firstly introduces the exchange rate fluctuations and fractal theory, and then analyzes empirically the foreign exchange market in two different sections.(ⅰ) We establish the mean rate of return equation after the normal test, stability test and correlation tests on the return series of exchange rate, and then do heteroskedasticity test and fitness as well as comparing with GARCH model, GARCH-M model, TGARCH model and the EGARCH model on the exchange rate data which has ARCH effects, and finally forecast the trend by using the best fitting model of the exchange rate volatility;(ⅱ) we explore the efficiency of the foreign exchange market before and after the reform as well as the fractal characteristic using R/S fractal methods.The empirical results show that:China’s foreign exchange market has nonlinear and fractal characteristics, and the return of exchange rate follows partial stochastic process and is not normalize distribution. Moreover, the return has the properties of autocorrelation, eteroscedasticity, long-term memory, persistent states, volatility clustering and so on. In addition, some exchange rate markets exist leverage effect.Finally, combining the empirical results, we present some suggestions about improving the efficiency of foreign exchange market based on the foundational stability:(ⅰ) Determining a reasonable range of exchange rate fluctuations; (ⅱ)Improving and perfecting the system of governmental interventions;(ⅲ) Maintaining the harmony between the size of foreign exchange reserves and the development of national economy;(ⅳ) Improving the monitoring of foreign exchange and early-warning system on balance of payments situation;(ⅴ) Improving the market mechanism and advancing independence and flexibility of market trading;(ⅵ) Perfecting the system of law and regulation on foreign exchange management.