A Study On Volatility Spillover Effect Among Rmb Onshore And Offshore Forward Exchange Rate Markets

As China has implemented a certain extent foreign exchange regulation for quite a long time,the development of onshore foreign exchange forward market is lagging behind.The offshore RMB NDF market becomes an alternative to the onshore one due to its higher degree of market.As a consequence,the onshore RMB exchange rate is usually affected by the NDF market.After the global financial crisis,China has accelerated the RMB internationalization through Currency swaps between Chinese central bank and other countries or regions,cross-border trade settlement,cross-border direct investment,financial investment and other channels.Foreign institutions and individuals' willingness to hold the RMB become greater.Then the Hong Kong offshore RMB deliverable forward market(CNH-DF)emerged to meet the offshore demand of exchange rate risk hedging.With the rapid development of RMB offshore market,the interaction among onshore and offshore markets become more active.In spite that a developed offshore market can promote the internationalization of the currency,it can't be ignored that the cross-border flowing of currency may have impacts on domestic monetary and brings potential risks to the domestic financial stability.Moreover,the interaction among financial markets is the main reason for the infection of financial risks across different markets.So an effective forward exchange market is needed in order to hedge the exchange rate risk,reduce the negative impact which the exchange rate has on the national economy and finance and grasp the initiative in the exchange rate pricing.Under the background of RMB internationalization,Hong Kong market,as the representative of RMB offshore markets,how will it make a difference in domestic market?This paper is based on this issue,takes RMB onshore and offshore forward exchange rate market as research objects,studying about the volatility spillover among the markets and the markets'price discovery ability before and after the establishment of the Hong Kong RMB offshore market.First of all,this paper introduces the current development of RMB offshore markets and the exchange rate forward markets in domestic and foreign,tells about the scale,traders and trading mechanism of markets,analyzes the reasons of financial markets' interaction,including the relaxation of financial regulation,asset pricing theory,the markets and the behaviors of traders,further,discusses the arbitrage mechanism among the forward markets.Secondary,the paper uses binary GC-MSV model,which using Markov Chain Monte Carlo(MCMC)method to estimate parameters,to research the volatility spillover among the forward exchange rate markets(including onshore forward exchange rate market,RMB non-delivery forward exchange rate market and Hong Kong RMB delivery forward exchange rate market)before and after the establishment of the Hong Kong RMB offshore market.Once more,using information share analysis to measure the every forward exchange rate market' s price discovery capability,and then explains the empirical results to explore the RMB exchange rate fluctuation information center.In the end,several policy recommendations are proposed,including how to deal with cross-border arbitrage,the innovative development of onshore forward exchange market,speeding up the market reform of interest rate and exchange rate,enabled the connectivity of forward markets,promoting the development of RMB offshore market.This paper draws the following conclusions:the RMB offshore markets are more efficient than onshore market both in transmission of fluctuation information and price discovery.RMB NDF markets are restricted by the development of Hong Kong RMB offshore market to some extent,and the later begins to have an impact on the onshore market.A new interaction among the onshore and offshore RMB forward markets has appeared.