Volatility transmissions between renminbi and Asia-Pacific on-shore and off-shore U.S. dollar futures

Abstract

This paper uses multivariate GARCH techniques to study volatility spillovers between the Chinese non-deliverable forward market and seven of its Asia-Pacific counterparts over the period January 1998 to March 2005. To account for the time-variability of conditional correlation, a dynamic correlation structure is included in the volatility model specification. The empirical results demonstrate that the renminbi non-deliverable forward (NDF) has been a driver of various Asian currency markets but that such co-movements exhibit a substantial degree of heterogeneity. As to the determinants of the magnitude of these co-movements, we test the relevance of potential factors and find that it is the degree of real and financial integration, in particular, that exerts the largest influence on volatility transmission.

Dynamic and Asymmetric Dependences Between Chinese Yuan and Other Asia‐Pacific Currencies

“…Patton () adopted the Student's‐ t GARCH model for both exchange rates of German mark and Japanese yen against the U.S. dollar. Colavecchio and Funke () applied a similar approach to the Asian NDF currency returns. Wang et al () utilized a multivariate GARCH model to investigate the dynamic correlations between spot, NDF, and deliverable forward exchange rates in Korea and Taiwan.…”

“…Therefore, our analysis is based on the NDF contracts with six‐month maturity. On the other hand, Colavecchio and Funke () applied the DCC‐GARCH models to the daily data of the NDF contacts with 12‐month maturity to examine the volatility transmissions and correlations between Chinese Yuan and exchange rates of other countries in the Asia‐Pacific region. For comparison purpose, we also examine the dependence structure with the data from the 12‐month maturity contracts.…”

“…To facilitate hedging and asset allocation decisions, the dependence structure in the normal situation (linear correlation) and in the extreme (nonlinear and tail dependences) are both examined. The dynamic linear correlation structure between the NDF rate of Chinese Yuan and each of five different currencies in the Asia‐Pacific region against the U.S. dollar were documented in Colavecchio and Funke () using a bivariate dynamic conditional correlation GARCH (DCC‐GARCH) model. However, the model cannot distinguish the dynamic dependence between the two variables of interests under normal and extreme conditions.…”

“…Specifically, except for Korean Won, the lower tail dependences between Chinese Yuan and other four Asian currencies are much smaller than the upper tail dependences. This asymmetric dependence has important implications for hedging and asset allocation decisions, which cannot be captured in the DCC‐GARCH framework of Colavecchio and Funke ().…”

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

“…The reason probably has been the de facto peg of the Renminbi to the US dollar (Xin, 2004). However, in July 2005 the currency regime was reformed with the result that a foreign exchange market could develop (Colavecchio and Funke, 2008). The Chinese currency offers a very interesting case to examine the unbiasedness hypothesis, as there are differences in the exchange rate regime in the period under consideration.…”