An Empirical Study Of RMB Exchange Rate Volatility

With China’s rapid economic development and more and more trades happen among countries,the volatility of RMB exchange rate has been the hot issue in financial field. In recent years, along with several major reform of the RMB exchange rate regime and the increasing pressure of RMB appreciation, especially after2005, China began to implement a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies, the RMB exchange rate showed frequent fluctuations, increas-ing flexibility, appreciation trend momentum, and it has aroused widespread concern at home and abroad.Autoregressive conditional heteroskedasticity (ARCH) family models por-tray the volatility characteristics of financial time series with good results. So the article tries to study the RMB exchange rate return volatility with ARCH family model based on the actual situation of China’s foreign exchange market, establishing ARCH model with the RMB exchange rate return series, getting the characteristics of RMB exchange rate fluctuation in order to get a better understanding of the RMB exchange rate volatility. First, we use the RMB exchange rate return series to establish the ARMA model which is also called the mean equation, finding that the residual series of the equation presents het-eroscedasticity. Then we establish ARCH model and GARCH model, finding that the RMB exchange rate return series has volatility persistence character-istics. Finally, considering the impact of asymmetry,we establish EGARCH model and find that the exchange rate of return series has "leverage effect". The paper is divided into five chapters. The first chapter is introduc-tion, which describes the background and significance of this study, domes-tic research and the structural arrangement of this paper. The second chap-ter introduces the time-series methods, including time-series data preprocess-ing, ARMA model and ARCH family models. The third chapter analyses the RMB exchange rate volatility in a theoretical view.The forth chapter uses RMB exchange rate series to establish ARCH family models and finds the model effect is gradually optimized after adding to "leverage effect". In addi-tion,we can draw that the RMB exchange rate return series has some features like fat tail,volatility persistence and leverage effect. The last chapter gives some advice about RMB exchange rate policy according to the results of the research. For example, our government should encourage importing to en-hance China’s capital "going out" strategy; controling the rhythm of changes in exchange rates; strengthening the construction of exchange rate derivatives market; strengthening the support of the trade policy for different industries based on the strategy of industrial restructuring.