Research on the Correlation between the Exchange Rate of Offshore RMB and the Stock Index Futures

Abstract

The offshore RMB exchange rate is affected by the supply and demand relationship in the international market, investor sentiment, market liquidity, and other factors, while the onshore RMB exchange rate is mainly affected by government regulation and intervention. Therefore, the offshore RMB exchange rate may be a better reflection of the market’s macroeconomic expectations and risk appetite for China. Stock index futures are mainly affected by macroeconomic factors, so studying the correlation between the offshore RMB exchange rate and stock index futures is helpful for risk management, hedging, and price discovery. In this study, we selected the offshore RMB exchange rate, the volume of stock index futures, and the absolute rate of return as variables of investor sentiment. Through the Granger causality test, impulse response function, and variance decomposition, we studied the correlation between the rate of return of stock index futures and the rate of return of the offshore RMB exchange rate. Furthermore, we constructed a GARCH conditional volatility model. It was concluded that the trading volume and the absolute rate of return of stock index futures could explain the price fluctuations of stock index futures very well. A change in the offshore RMB exchange rate yield causes a change in the yield of stock index futures. Policymakers need to pay close attention to changes in the offshore RMB exchange rate in order to better grasp market trends and manage risks accordingly.