Please use this identifier to cite or link to this item: http://scholarbank.nus.edu.sg/handle/10635/147488
Title: A STUDY BETWEEN CHINA’S MONETARY POLICY AND ITS FOREIGN EXCHANGE MARKET
Authors: ONG CHOON KEONG
Issue Date: 2009
Citation: ONG CHOON KEONG (2009). A STUDY BETWEEN CHINA’S MONETARY POLICY AND ITS FOREIGN EXCHANGE MARKET. ScholarBank@NUS Repository.
Abstract: This study focuses on the analysis between the onshore and offshore RMB forward markets, where they are highly similar, but are subject to different economic and legal jurisdictions. Our studies are twofold: first, we attempt to determine and compare the extent of market efficiency in these two markets, given the vast empirical literature and findings on some common anomalies on currency forwards (i.e. forward rate biases). Similarly to past findings, we argue that the forward rate biases in China’s context are due to exchange-rate and political risk premiums being incorporated into both onshore and offshore currency forwards. Following that, we attempt to uncover the underlying determinants of the covered interest parity deviations in each market, by decomposing them with a list of macroeconomic variables that proxy for exchange rate risk and political risk. Based on our findings, we find that the offshore forward markets display a higher level of market efficiency as compared to the onshore markets, from a 1) forward rate bias, 2) forward premium puzzle and 3) covered interest parity perspective. We find that the onshore biases tend to remain sticky and persistent over time, while the offshore biases tend to follow a random walk process with no persistent direction. Through the decomposition of the CIP deviations, we also find evidence that the offshore deviations are on average, larger than the onshore deviations, and that both exchange-rate and political risk variables account for a greater proportion of the offshore deviations than the onshore deviations. As such, this provides support that the offshore markets are more efficient in pricing in risk premiums, as compared to the onshore market, which have controls and restrictions on both interest rate and RMB movements.
URI: http://scholarbank.nus.edu.sg/handle/10635/147488
Appears in Collections:Bachelor's Theses

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