RMB Exchange Rates and Volatility Spillover across Financial Markets in China and Japan

Fengming Qin,Zhaoyong Zhang,Junru Zhang

doi:10.3390/risks6040120

Abstract

This study examines empirically the volatility spillover effects between the RMB foreign exchange markets and the stock markets by employing daily returns of the Chinese RMB exchange rates and the stock markets in China and Japan during the period in 1998–2018. We find evidence that there exist co-volatility effects among the financial markets in China and Japan, and the volatility of RMB exchange rates contribute to the co-volatility spillovers across the financial markets. Reversely, the return shock from the stock markets can also generate co-volatility spillover to the foreign exchange markets. The bidirectional relationship reveals that both the fundamental hypothesis and the investor-induced hypothesis are valid. Our estimates also show that the spillover effects led by the stock market in Japan are stronger than that from the foreign exchange markets and the Chinese stock markets, implying that market with higher accessibility has greater spillover effects onto other markets. We also found that the average co-volatility spillover effects among the RMB exchange markets and the stock markets in Japan and China are generally negative. These findings have important policy implications for risk management and hedging strategies.

Highlights

With China’s economic rise and rapid financial integration with the rest of the world, the increased trade and investment have caused demand in hedging against the foreign exchange risk associated with Renminbi (RMB) to rise substantially (Lien et al 2013)
First, there exists a bidirectional relationship between the volatility spillover effects among the foreign exchange market and the stock markets, and shocks originated from RMB exchange rates and stock markets both affect the co-volatility
We have examined the volatility spillover effects between the RMB foreign exchange markets and the stock markets by employing daily returns of the Chinese RMB exchange rates and the stock markets in China and Japan during the period in 1998–2018

Summary

Introduction

With China’s economic rise and rapid financial integration with the rest of the world, the increased trade and investment have caused demand in hedging against the foreign exchange risk associated with Renminbi (RMB) to rise substantially (Lien et al 2013). The recent measures undertaken by the Chinese government to liberalize its financial sector and to internationalize the RMB, especially since the global financial crisis (GFC), have led to high volatility of the RMB exchange rates and increased the volatility spillover effect across the financial markets both in China and across countries. Given the rising foreign exchange risk associated with RMB internationalization, it is important to investigate the pattern and characteristics of the volatility spillover effect across the financial markets, especially for hedging strategy and for international portfolio decision.

Objectives

Methods

Discussion

Conclusion