Research On The Foreign Exchange Intervention Of Central Bank Based On TR-GARCH Model And VAR Model

With the rapid development of economy, the international balance of payments surplus of China is increasing, and the exchange rate of RMB faces continual appreciation pressure. The stability of exchange rate is related to the healthy development of the financial economy and the balance of international payments. As the primary tool for the management of the exchange rate, the central bank's foreign exchange intervention plays an important role on maintaining the equilibrium of RMB exchange rate and reducing exchange rate fluctuations. Since 2014, the People's Bank of China adopted a regime of RMB exchange rate floating in two directi ons and broadened the fluctuation range of median price, the appreciation of RMB exchange rate accelerated. While in 2015, RMB exchange rate is faced with a sharp increase in depreciation pressure. In order to keep the exchange rate floating in the predetermined section, central bank has no choice but intervene the foreign exchange market. In this context, it is of great important to study the characteristics and effectiveness of central bank's foreign exchange intervention.The TR-GARCH model is used to study the characteristics of central bank's foreign exchange intervention, and VAR model is used to inspect its effectiveness. Firstly, the thesis explains the concept, methods, objects and characteristics of foreign exchange intervention, discusses the central bank's foreign exchange intervention reaction function, analyses the transmission channels of central bank's foreign exchange intervention and its effectiveness. After that, the thesis constructs a TR-GARCH model of central bank's foreign exchange intervention reaction function with the combination of TR model and GARCH model to describe the foreign exchange intervention's asymmetry and heteroscedasticity features. Finally, the thesis studies the characteristics of central bank's foreign exchange intervention with the TR-GARCH model empirically, and tests the effectiveness of the central bank's foreign exchange intervention with the VAR model.The results show that the central bank's foreign exchange intervention has asymmetric, leaning against the wind and heteroscedasticity and other features. The results also prove that the targets of central bank's foreign exchange intervention are reducing the foreign exchange rate fluctuations and preventing exchange rate smoothing away from the equilibrium exchange rate level. According to the standard of smooth, central bank's foreign exchange intervention is effective, which means that the central bank's foreign exchange intervention can reduce exchange rate fluctuations and keep the exchange rate on the equilibrium level.