The RMB Central Parity Formation Mechanism: August 2015 to December 2016

Journal of International Money and Finance, Forthcoming

21 Pages Posted: 22 Mar 2017 Last revised: 24 Jul 2018

See all articles by Yin-Wong Cheung

Yin-Wong Cheung

City University of Hong Kong - Department of Economics & Finance; University of California, Santa Cruz - Department of Economics; University of California at Santa Cruz - Department of Economics

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department

Andrew Tsang

Hong Kong Monetary Authority

Date Written: March 12, 2018

Abstract

We study the renminbi (RMB) central parity formation mechanism following the August 2015 reform using statistical models. We identify the roles of the onshore and offshore RMB exchange rates and the US dollar index in determining the central parity in a linear regression framework. The effect of the RMB currency basket index, however, is revealed after controlling for multiplicative offshore RMB volatility effects. The offshore RMB volatility exerts a dampening effect on the links between the central parity and its determinants. In the prediction comparison exercise, the three selected models statistically outperform the random walk benchmark. Among these four models, the selected multiplicative specification yields the smallest root-mean squared prediction error and mean absolute prediction error.

The previous name of the paper was: "The RMB Central Parity Formation Mechanism after August 2015: A Statistical Analysis".

Keywords: China’s Exchange Rate Policy, Currency Basket, Multiplicative Interaction Model, Onshore and Offshore RMB Rates, Volatility

JEL Classification: F31, F33

Suggested Citation

Cheung, Yin-Wong and Hui, Cho-Hoi and Tsang, Andrew, The RMB Central Parity Formation Mechanism: August 2015 to December 2016 (March 12, 2018). Journal of International Money and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2938311 or http://dx.doi.org/10.2139/ssrn.2938311

Yin-Wong Cheung

City University of Hong Kong - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

University of California, Santa Cruz - Department of Economics ( email )

435 Engineering 2
Santa Cruz, CA 95064
United States
831-459-4247 (Phone)
831-459-5077 (Fax)

University of California at Santa Cruz - Department of Economics ( email )

1156 High Street
Santa Cruz, CA 95064
United States

Cho-Hoi Hui

Hong Kong Monetary Authority - Research Department ( email )

Hong Kong
China

Andrew Tsang (Contact Author)

Hong Kong Monetary Authority ( email )

55/F, Two International Finance Centre
Hong Kong
Hong Kong

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