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Empirical Economics

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31-12-2015

Exchange rate persistence of the Chinese yuan against the US dollar in the NDF market

Authors: Carlos P. Barros, Luis A. Gil-Alana, Zhongfei Chen

Published in: Empirical Economics | Issue 4/2016

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Abstract

This article analyses the persistence of the exchange rates of the Chinese yuan against the US dollar in the NDF market during 1999–2012 with fractional integration technique. It concludes that the exchange rates are I(d) with d close to 1 though statistically significantly below 1, suggesting a small degree of mean reverting behaviour. And the squared returns display long memory with an order of integration of about 0.2. Moreover, the unit root null hypothesis cannot be rejected during the years during 2006–2011 when the international financial crisis broke out and the exchange rate regime reform implemented. At last, we notice that d in the original series is highly negatively correlated with respect to the mean and the variance in the exchange rates, while it is positively correlated with them in the squared returns. And policy implications are also suggested.

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The renminbi was fully convertible under the current account at the end of 1996, while the capital account of China is still under control.

The RMB NDF market is a traditional offshore RMB market. Trades are independently of either onshore CNY or offshore CNH.

Examples of I(0) processes are the white noise and the stationary ARMA processes.

The deterministic terms were chosen according to the t values of the coefficients in the d differenced processes, which are supposed to be I(0).

See Lobato and Savin (1998), Gil-Alana (2003), Cavalcante and Assaf (2004) and Cotter (2005) in the context of financial time series data.

The choice of 2 years is completely arbitrary but is done to justify a sufficiently large number of observations for each subsample.

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Title: Exchange rate persistence of the Chinese yuan against the US dollar in the NDF market
Authors: Carlos P. Barros
Luis A. Gil-Alana
Zhongfei Chen
Publication date: 31-12-2015
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 4/2016
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-015-1063-3

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