Forecasting the volatility of onshore and offshore USD/RMB exchange rates using a multifractal approach

Abstract

This paper combined the MFDFA(multifractal detrended fluctuation analysis) and MFDCCA (multifractal detrended crossing correlation analysis) with time singularity multifractal spectrum to analyze the volatility relationship between onshore and offshore USD/RMB exchange rates. We find some evidences on the volatility of onshore and offshore exchange rate:(1) The characteristics of long-term memory, multifractal properties and asymmetry all exist in the volatility of onshore and offshore exchange rates, and these characteristics appear stronger in the onshore market than in the offshore market. (2) The volatility in the onshore (CNY) market involved more forces, producing higher risk and lower market efficiency than that of the offshore (CNH) market. The empirical results of correlation study are: (1) There was a continuous positive correlation between the volatility of the onshore and offshore USD/RMB exchange rates, which manifested stronger in the spot market. (2) The responses of the onshore and offshore currency exchange rates to an external shock are different. The volatility of onshore exchange rate is more sensitive to news. When an external shock changed the fluctuation direction of the market exchange rate, this correlation disappeared and was replaced by a negative dependence. However, the negative correlation was corrected within a very short period, after which the positive correlation returned. (3) An examination of the risk properties between the onshore and offshore exchange rates showed the existence of a bidirectional conduction effect between them.