Abstract
ABSTRACT This paper investigates the dependence structure between the renminbi (RMB) onshore spot and offshore NDF markets using a GARCH-dynamic copula model. We document that the central parity reform in August 2015 marked a structural change in the dependence structure between the onshore spot and offshore NDF markets. Since the reform, the conditional correlation and tail dependence between the two markets have significantly increased and exhibited apparent time-varying patterns. We show that the difference between the central parity and spot rates and the degree of market segmentation between CNY and NDF markets are two crucial factors driving the time-varying CNY-NDF dependence. Furthermore, we find symmetric downside and upside risk spillovers between the two markets transmitted in both directions. The magnitude of spillovers has significantly increased since the reform. Our findings are particularly relevant for policy-making and portfolio risk management.
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