Cointegration and Causality among the Onshore and Offshore Markets for China's Currency

Posted: 18 Sep 2020

See all articles by David T. Owyong

David T. Owyong

BOCI-Prudential Asset Management

Wing Keung Wong

Asia University - Department of Finance

Ira Horowitz

University of Florida

Date Written: October 2015

Abstract

China has taken steps to develop offshore markets for renminbi trading and to liberalize exchange-rate determination in its onshore market. We examine the interaction between onshore and offshore markets with attention to how the interaction has been affected by widening of the onshore trading band first in April 2012 and further in March 2014. Ties between the onshore and offshore markets were closest before the first band widening and steadily loosened thereafter. We further study the co-integration and lead-lag effects between offshore and onshore spot and forward markets and show that there is a long-term equilibrium relationship between any pair of them. Our results suggest stronger causality running from the spot onshore rate to the spot offshore rate than vice versa. Between the spot and forward markets, there is evidence of bidirectional linear and nonlinear causality, which implies foreign impulses have had an influence on the domestic market.

Suggested Citation

Owyong, David T. and Wong, Wing Keung and Horowitz, Ira, Cointegration and Causality among the Onshore and Offshore Markets for China's Currency (October 2015). Journal of Asian Economics, Vol. 41, No. C, 2015, Available at SSRN: https://ssrn.com/abstract=3667496

David T. Owyong (Contact Author)

BOCI-Prudential Asset Management ( email )

27th Floor, Bank of China Tower
1 Garden Road
Hong Kong
Hong Kong

Wing Keung Wong

Asia University - Department of Finance ( email )

Wufeng, 41354
Taiwan

Ira Horowitz

University of Florida ( email )

PO Box 117165, 201 Stuzin Hall
Gainesville, FL 32610-0496
United States

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