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Yen/Dollar volatility and Chinese fear of floating: Pressures from the NDF market

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Author Info

  • Gu, Li
  • McNelis, Paul D.

Abstract

This paper examines financial market data to assess the likelihood of Renminbi appreciation and its implications for Chinese financial markets, given the continuing volatility of the exchange rate between the US Dollar and the Japanese Yen. Using VAR and Bayesian VAR estimation, we find that the 3-month Non-deliverable Forward premia are a key series which link Yen/Dollar volatility to financial market movements in China through speculative pressure. By contrast, the NDF market for the Korean Won, based on more flexible spot exchange market and open access by domestic banks, plays little or no role linking Yen/Dollar to domestic currency or financial markets in Korea.

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Bibliographic Info

Article provided by Elsevier in its journal Pacific-Basin Finance Journal.

Volume (Year): 22 (2013)
Issue (Month): C ()
Pages: 37-49

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Handle: RePEc:eee:pacfin:v:22:y:2013:i:c:p:37-49

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Web page: http://www.elsevier.com/locate/pacfin

Related research

Keywords: Prediction; Bayesian forecasting; Out-of-sample Granger tests of causality; Nested models; VAR; Bayesian VAR;

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References

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  1. James H. Stock & Mark W. Watson, 1999. "Forecasting Inflation," NBER Working Papers 7023, National Bureau of Economic Research, Inc.
  2. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  3. Park, Jinwoo, 2001. "Information flows between non-deliverable forward (NDF) and spot markets: Evidence from Korean currency," Pacific-Basin Finance Journal, Elsevier, vol. 9(4), pages 363-377, August.
  4. Virginie Coudert & C├ęcile Couharde, 2005. "Real Equilibrium Exchange Rate in China," Working Papers 2005-01, CEPII research center.
  5. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
  6. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2001. "Modeling and Forecasting Realized Volatility," Center for Financial Institutions Working Papers 01-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
  7. Jeffrey Frankel, 2006. "On the Yuan: The Choice between Adjustment under a Fixed Exchange Rate and Adjustment under a Flexible Rate," CESifo Economic Studies, CESifo, vol. 52(2), pages 246-275, June.
  8. Yin-Wong Cheung & Menzie D. Chinn & Eiji Fujii, 2008. "Pitfalls in Measuring Exchange Rate Misalignment: The Yuan and Other Currencies," NBER Working Papers 14168, National Bureau of Economic Research, Inc.
  9. Guonan Ma & Corrinne Ho & Robert N McCauley, 2004. "The markets for non-deliverable forwards in Asian currencies," BIS Quarterly Review, Bank for International Settlements, June.
  10. Colavecchio , Roberta & Funke, Michael, 2006. "Volatility transmissions between renminbi and Asia-Pacific on-shore and off-shore U.S. dollar futures," BOFIT Discussion Papers 16/2006, Bank of Finland, Institute for Economies in Transition.
  11. Litterman, Robert B, 1986. "Forecasting with Bayesian Vector Autoregressions-Five Years of Experience," Journal of Business & Economic Statistics, American Statistical Association, vol. 4(1), pages 25-38, January.
  12. Niehans, Jurg, 1981. "Static deviations from purchasing-power parity," Journal of Monetary Economics, Elsevier, vol. 7(1), pages 57-68.
  13. Jarque, Carlos M. & Bera, Anil K., 1980. "Efficient tests for normality, homoscedasticity and serial independence of regression residuals," Economics Letters, Elsevier, vol. 6(3), pages 255-259.
  14. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
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