| The People’s Bank of China has been utilizing a more market-oriented way of forming the CNY central parity rate since the reform of exchange rate formation mechanism on August 11th,2015,the effect of which on RMB derivative markets remains unknown.Among RMB FX derivatives,the onshore CNY options and the Offshore non-deliverable CNY options share the same underlying asset,that is,the onshore CNY exchange rate.However,there always exist differences in prices between these two options due to regulations that limit onshore-offshore arbitrage,which results in different option-implied FX distributions in these two markets.We divide our sample into 3 periods around the FX reform.Then we extract model-free implied volatility and risk-neutral skewness from both onshore and offshore 1-month USDCNY options,and compare their ability of predicting the future in a vertical and horizontal way.The results show that,as the central parity rate becomes market-oriented,the information content of both onshore and offshore options has notably increased.After the reform,the risk-neutral skewness in both markets is significantly negatively correlated with future exchange rate return and positively correlated with left-tail risk,which indicates a strong risk aversion in RMB FX markets.At the same time,model-free implied volatility can effectively explain changes in future realized volatility.When comparing the relative information efficiency between onshore and offshore markets,we find mixed results in model-free implied volatility and risk-neutral skewness.For model-free implied volatility,the onshore market was more efficient in the first period after the reform,while the offshore market showed information superiority in the second period.For model-free risk-neutral skewness,the offshore market was remarkably better in efficiency in the early stage after the reform,while the onshore market showed slightly more information content in the later stage. |
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