Abstract
We study the renminbi (RMB) central parity formation mechanism following the August 2015 reform using statistical models. We identify the roles of the onshore and offshore RMB exchange rates and the US dollar index in determining the central parity in a linear regression framework. effect of the RMB currency basket index, however, is revealed after controlling for multiplicative offshore RMB volatility effects. offshore RMB volatility exerts a dampening effect on the links between the central parity and its determinants. In the prediction comparison exercise, the three selected models statistically outperform the random walk benchmark. Among these four models, the selected multiplicative specification yields the smallest root-mean squared prediction error and mean absolute prediction error. The previous name of the paper was: The RMB Central Parity Formation Mechanism after August 2015: A Statistical Analysis.
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