Co-movement Between The Domestic And Hong Kong RMB Market

With the growing of China’s economic and the advancement of reform of exchange rate system, the internationalization of RMB process is accelerating. While the domestic foreign exchange markets keep on developing, offshore CNY market in Hong Kong(CNH) also got rapid development at the same time since it began to appear. Together with the original Hong Kong non-deliverable forwards market(NDF), Offshore CNY market in Hong Kong constitutes the most important RMB offshore financial market. The exists of the offshore markets not only increase the types of foreign exchange market in our country, but also promote the process of RMB internationalization. Clarify the relationship between these markets correctly not only helps the investors to avoid market risk but also helps the domestic regulators to take measures to avoid the slipping of RMB exchange pricing power. As the result, the research of mutual pricing relations between the onshore and offshore RMB prices and the information flow relationship has very important realistic meaning, especially after the launch of Hong Kong offshore RMB spot rate. This paper’s research is based on these backgrounds.This paper first introduces the interest rate parity and effective hypothesis in foreign exchange, as well as the information transition mechanism. Then the paper summarizes previous research results of onshore and offshore markets. On the basis this paper descriptive analysis the development and present situation the correlation between the onshore and offshore markets. Then this paper use the Granger causality test and the DCC-MVGARCH model, respectively from the price premium effect and the volatility spillover effect to research the relationship among RMB spot market, the domestic forwards market, the Hong Kong offshore spot market and the Hong Kong NDF market. The empirical result shows that RMB spot market together with the offshore NDF market occupies the dominant position in terms of price premium; in the terms of volatility spillover, it appears that the onshore markets is significant to the fluctuation of the RMB market in Hong Kong, at the same time we also notice that the domestic forwards market also exists some volatility spillover effect. Overall the domestic currency forwards market information center positioning is gradually revealed, but the RMB forwards market price discovery function remains to be better, so the pace of the exchange rate reform cannot relax.Based on the conclusion, this paper at last give some theoretical and practical advices to the perfect of multi-level RMB foreign exchange markets in the construction and promoting the construction of offshore RMB market in Hong Kong, which help the investors hedging provide guidance and also help the central bank to control the foreign exchange risk, promote the internationalization of the RMB.