The relationship between the Renminbi future spot return and the forward discount rate

Information Flow Between Forward and Spot Markets: Evidence From the Chinese Renminbi

“…Second, extending previous studies which only focus on only one RMB NDF contract with a short maturity (i.e., 1‐month or 3‐month maturity) (e.g., Ding et al, ; Gu and McNelis, ; Zhao et al, ), we exploit the term structure of RMB NDF forward rates up to 12‐month maturity and document the importance of additional information from longer maturity (i.e., 6‐month and 12‐month) forward rates in driving the spot rate movement. Specifically, the shocks to 6‐month and 12‐month (1‐month and 3‐month) forecast error variance decomposition together can on average explain at least 20% (about 43%) of the spot rate variation at the short horizon of 1‐week and about 35–40% (about 44%) at the longer horizons of half a year to a year.…”

“…Figure 1). 21 Interestingly, a break date of late June 2008 is consistently identified in Zhao et al (2013), which is argued to due to the impact of the global financial crisis on Chinese foreign exchange market. While they do not explicitly allow for potential breaks in cointegration space in identifying the break date, they (p.164) show in the subsequent analysis that cointegration between spot and forward rates does not exist between March 2008 and February 2009 (based on their identified break dates).…”

“…First, we more thoroughly examine the dynamics on the RMB‐dollar market by more adequately allowing for potentially multiple structural breaks due to significant foreign exchange policy changes in China since 2005. While cointegration analysis is now a standard framework in analyzing the relationship between currency spot and forward rates, and the literature has recognized the potential for multiple structural breaks between RMB spot and (nondeliverable) forward rates (e.g., Ding et al, ; Zhao, de Haan, Scholtens, & Yang, ), we propose and apply a new approach to jointly determine structural breaks and cointegration via the model selection approach. Extending the literature (e.g., Zhao et al, ), the new approach simultaneously allows for potential multiple structural breaks in parameters of both cointegration space and short‐run dynamics (i.e., the first‐differenced VAR coefficients) among RMB spot and forward rates .…”

“…While cointegration analysis is now a standard framework in analyzing the relationship between currency spot and forward rates, and the literature has recognized the potential for multiple structural breaks between RMB spot and (nondeliverable) forward rates (e.g., Ding et al, ; Zhao, de Haan, Scholtens, & Yang, ), we propose and apply a new approach to jointly determine structural breaks and cointegration via the model selection approach. Extending the literature (e.g., Zhao et al, ), the new approach simultaneously allows for potential multiple structural breaks in parameters of both cointegration space and short‐run dynamics (i.e., the first‐differenced VAR coefficients) among RMB spot and forward rates . We find that RMB spot and four forward rates can be still characterized as containing four cointegrating relationships as theory predicts, although unlike Clarida and Taylor () the long‐run relationships do not exactly correspond to each of the four forward premia during the sample…”

The Time-Varying Causal Relationship Between International Capital Flows and the Real Effective Exchange Rate: New Evidence for China

“…Figure 4, Panel C shows that the null hypothesis that the REER does not Granger cause the CA cannot be rejected at the 10% significance level in 2010:Q2-2011:Q2 and 2011:Q4. On 19 June, 2010, the PBOC announced a return to a managed floating exchange rate regime under which the spot exchange rate can move intraday with at most 0.5% from the central parity (Zhao et al, 2013). This is a return to a more flexible and more market-based exchange rate regime like the PBOC had pursued during 2005-08.…”