Efficiency of Regulated and Unregulated FOREX Markets: An Analysis of Onshore and Offshore Renminbi Forward Markets

International Finance Review, Vol. 17, The Political Economy of Chinese Finance, Emerald Publishing

Posted: 27 May 2016

See all articles by Zsuzsa R. Huszar

Zsuzsa R. Huszar

National University of Singapore ; Central European University

Weina Zhang

Department of Finance, National University of Singapore; National University of Singapore Risk Management Institute

R.S.K. Tan

National University of Singapore

Date Written: November 27, 2015

Abstract

This study provides new insights about the functioning of Renminbi (RMB) FOREX market by testing the market efficiency in the onshore and offshore RMB FOREX markets. In the onshore and offshore FOREX markets, the RMB forward contracts are designed in similar ways. However, the underlying economic forces and regulatory frameworks are very different in these two markets. We examine the functioning of each market by testing the covered interest rate parity (CIRP) conditions and explore the CIRP deviations in relation to market frictions and government interventions. While the CIRP conditions do not hold in either markets, the offshore market is shown to be more efficient by conveying more private information about investors’ expectation. Overall, we suggest that by opening the offshore market to domestic participants and the onshore market to more foreigners, the forward rates may become more informative with a greater investor mix. These liberalization efforts are important steps in the right directions to improve market efficiency in the Chinese FOREX market.

Keywords: FOREX Market, Onshore, offshore, China, covered interest rate parity (CIRP)

JEL Classification: F01, F15, F31

Suggested Citation

Huszar, Zsuzsa R. and Zhang, Weina and Tan, Ruth Seow Kuan, Efficiency of Regulated and Unregulated FOREX Markets: An Analysis of Onshore and Offshore Renminbi Forward Markets (November 27, 2015). International Finance Review, Vol. 17, The Political Economy of Chinese Finance, Emerald Publishing, Available at SSRN: https://ssrn.com/abstract=2785530

Zsuzsa R. Huszar (Contact Author)

National University of Singapore ( email )

Business School
15 Kent Ridge Drive
Singapore, 117592
Singapore
+65 6516 8017 (Phone)
+65 6779 2083 (Fax)

Central European University ( email )

Nador utca 9
Budapest, H-1051
Hungary

Weina Zhang

Department of Finance, National University of Singapore ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore
65168120 (Phone)
67792083 (Fax)

HOME PAGE: http://bizfaculty.nus.edu/faculty-profiles/108-weina

National University of Singapore Risk Management Institute ( email )

21 Heng Mui Keng Terrace
Level 4
Singapore, 119613
Singapore

Ruth Seow Kuan Tan

National University of Singapore ( email )

1 Business Link
Singapore 117592, 117592
Singapore
65-65166265 (Phone)
65-67792083 (Fax)

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