Volatility transmission and volatility impulse response functions in the main and the satellite Renminbi exchange rate markets

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Title: Volatility transmission and volatility impulse response functions in the main and the satellite Renminbi exchange rate markets
Author: Funke, Michael ; Loermann, Julius ; Tsang, Andrew
Organization: Bank of Finland
Department / Unit: Institute for Economies in Transition (BOFIT)
Series: BOFIT Discussion Papers
Series number: 22/2020
Year of publication: 2020
Publication date: 6.10.2020
Published in: Published in Review of International Economics, Vol. 30, 2022, 606–628 https://doi.org/10.1111/roie.12577
Pages: 32
Subject (yso): valuuttakurssit; volatiliteetti
Keywords: Bofit-kokoelma
JEL: C32; E58; F31; F51
Other keywords: Renminbi; volatility spillovers; volatility impulse responses; Bayesian estimation; multivariate GARCH models; USD; Renminbi; CNY; CNH; Kiina; Yhdysvallat
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.
Table of contents: Contents Abstract ... 4 1 Introduction... 5 2 Institutional background and data for RMB exchange rates... 7 2.1 Institutional background ... 7 2.2 Data ... 9 3 Econometric methodology ... 11 3.1 Multivariate GARCH: The BEKK model ... 11 3.2 Volatility impulse response functions and identification... 11 3.3 Bayesian estimation... 12 4 Estimation results... 14 4.1 Posterior summary statistics, convergence – and model diagnostics... 14 4.2 VIRF analysis ... 16 (I) Exchange rate regime changes ... 16 (II) Financial market turbulences ... 20 (III) The US-China trade conflict ... 22 5 Conclusion... 27 References... 28 Appendix: Convergence... 30
Rights: https://helda.helsinki.fi/bof/copyright

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