Currency Exposure in China under the New Exchange Rate Regime: National Level Evidence

Abstract

Use policyThe full-text may be used and/or reproduced, and given to third parties in any format or medium, without prior permission or charge, for personal research or study, educational, or not-for-prot purposes provided that:• a full bibliographic reference is made to the original source • a link is made to the metadata record in DRO • the full-text is not changed in any way The full-text must not be sold in any format or medium without the formal permission of the copyright holders.Please consult the full DRO policy for further details. AbstractThe present paper studies China's national level currency exposure since 2005 when the country adopted a new exchange rate regime allowing the renminbi (RMB) to move towards greater flexibility. Using generalized autoregressive conditional heteroskedastic and constant conditional correlation-generalized autoregressive conditional heteroskedastic methods to estimate the augmented capital asset pricing models with orthogonalized stock returns, we find that China equity indexes are significantly exposed to exchange rate movements. In a static setting, there is strong sensitivity of stock returns to movements of China's tradeweighted exchange rate, and to the bilateral exchange rates except the RMB/dollar rate. However, in a dynamic framework, exposure to all the bilateral currency pairs under examination is significant. The results indicate that under the new exchange rate regime, China's gradualist approach to moving towards greater exchange rate flexibility has managed to keep exposure to a moderate level. However, we find evidence that in a dynamic setting, the exposure of the RMB to the dollar and other major currencies is significant. For China, the challenge of managing currency risk exposure is looming greater.

Global Volatility Spillover, Transaction Cost and CNY Exchange Rate Parities

“…Recent fluctuations in Chinese exchange rate and growing influence of its economy in most countries, it is pertinent to investigate the integration of CNY exchange rate with global volatility indicators. This study considers the interaction of four exchange rate parities of Chinese Yuan (CNY) with respect to the United States Dollar (USD), the Japanese Yen (JPY), the Euro (EUR), and the British Pound (GBP) with global volatility index (VIX) and their corresponding volatility indices VXFXI, JYVIX, EUVIX and BPVIX as the exposure of the CNY to the dollar and other major currencies is significant (Nie, Zhang, Zhang, & Zhou, 2015). Our paper also accommodates policy break in CNY exchange rate on 11 th August 2015.…”