Volatility Transmission and Volatility Impulse Response Functions in the Main and the Satellite Renminbi Exchange Rate Markets

32 Pages Posted: 21 Oct 2020

See all articles by Michael Funke

Michael Funke

University of Hamburg - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Julius Loermann

University of Hamburg - Department of Economics

Andrew Tsang

University of Hamburg - Faculty of Business, Economics, and Social Sciences

Date Written: October 21, 2020

Abstract

We analyse volatility spillovers between the on- and offshore (CNY and CNH) Renminbi exchange rates towards the US dollar (USD). The volatility impulse response (VIRF) methodology introduced by Hafner and Herwatz (2006) is applied to several shocks between January 2012 and December 2019. Furthermore, we propose a novel way of estimating VIRFs based on Bayesian estimation of the MV-GARCH BEKK model. A simple Independence Chain Metropolis-Hastings algorithm allows drawing VIRFs in an efficient manner, allowing to analyse the significance and persistence of volatility shocks and associated volatility spillovers. The VIRF results show that the CNH exchange rate promptly reflects the global market demand and supply, while the CNY exchange rate reacts with a time lag. The VIRF results also show the existence of spillovers between the two markets as the co-volatility increases in response to shocks.

Keywords: Renminbi, volatility spillovers, volatility impulse responses, Bayesian estimation, multivariate GARCH models

JEL Classification: C32, E58, F31, F51

Suggested Citation

Funke, Michael and Loermann, Julius and Tsang, Andrew, Volatility Transmission and Volatility Impulse Response Functions in the Main and the Satellite Renminbi Exchange Rate Markets (October 21, 2020). BOFIT Discussion Paper No. 22/2020, Available at SSRN: https://ssrn.com/abstract=3716536

Michael Funke (Contact Author)

University of Hamburg - Department of Economics ( email )

Von-Melle-Park 5
room 2128 C rise
Hamburg, 20146
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Julius Loermann

University of Hamburg - Department of Economics ( email )

Von-Melle-Park 5
room 2128 C rise
Hamburg, 20146
Germany

Andrew Tsang

University of Hamburg - Faculty of Business, Economics, and Social Sciences ( email )

Von-Melle-Park 9
Hamburg, 20146
Germany

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