Analysis of Long-term Equilibrium Relationship Between KRW, RMB, JPY Exchange Rates and International Financial Market Variables: Comparative Analysis of KRW, RMB, JPY

Abstract

This study used 15 VECM analysis models to analyze the relationship among exchange rates of South Korea, China and Japan; and between exchange rates of each country and international financial market variables. The analysis variables are the Won, Yuan, Yen spot exchange rates and international financial market variables. The results of the analysis are as follows: First, there was a long-term cointegration relationship between RMB, KRW, JPY and international financial market variables. Second, the analysis results of the VECM showed that explanatory power of Korea's offshore Won-Dollar accounts for 50% of the onshore Won-Dollar. The results of the analysis of the Yuan's VECM showed that the onshore Yuan (CNY) and offshore Yuan (CNH) exchange influence, but each has its own independent characteristics. Overall, the Won is more integrated with the international financial market than the Yuan. The Yen's relationship with variables in the international financial market was stronger than that of the Won and the Yuan. Third, offshore Won-Dollar, onshore KRW, and JPY had similar Granger causality relationship and impulse responses with international financial market variables. However, CNH and CNY indicated weaker than that of Won and Yen. The onshore Won-Dollar is shown to partially offset the shock from the onshore Yuan and offshore Yuan. The implications of this study are as follows: First, it is important to look at the exchange rate from the perspective of the international financial market. Second, Yuan investment and risk management are necessary considering the characteristics of the onshore and offshore Yuan which are interrelated but also distinctly unique markets. Third, it is necessary to manage the exchange rate position, taking into account the long-term equilibrium relationship among the Won, Yuan, and Yen currencies. Fourth, Korean companies should find a way to actively utilize the Won which shows the characteristics of partial internationalization.