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The Risk Contagion Effect of Return Volatility between China’s Offshore and Onshore Foreign Exchange Market

Author

Listed:
  • Zhaosu MENG

    (Department of Finance, College of Economics, Ocean University of China, Qingdao, China.)

  • Kedong YIN

    (Department of Finance, College of Economics, and Ocean Development Research Institute, Major Research Base of Humanities and Social Sciences of Ministry of Education, Ocean University of China, Qingdao, China.)

  • Yan ZHANG

    (Department of Finance, College of Economics, Ocean University of China, Qingdao, China.)

  • Xun DONG

    (Department of Finance, College of Economics, Ocean University of China, Qingdao, China.)

Abstract

The main objective of the paper is to study the risk contagion effect of return volatility between China’s offshore and onshore foreign exchange market. Based on the formation mechanism of offshore RMB, we divide the offshore RMB exchange rate indices into three stages. The VAR model is applied to analyze the impact direction, extent and duration of the return volatility. GARCH-Granger overall risk contagion model and Contagion-MGARCH time-varying risk contagion model are applied for the static and dynamic analysis on the risk transmition between the offshore and onshore markets. The empirical conclusions are as follows: the direction and the extent of the risk contagion effect of return volatility between China's offshore and onshore foreign exchange market.is quite different as time varys. The transmission channels of financial risks between the offshore and onshore markets vary in the different stages. Among all three stages, offshore foreign market has a significant contagion effect to the onshore foreign exchange market. Compared with the overall contagion studies, the time-varying method shows a more intuitive and dynamic process of risk contagion effect. The results provide a reference for the construction of the offshore RMB financial market in the internationalization process.

Suggested Citation

  • Zhaosu MENG & Kedong YIN & Yan ZHANG & Xun DONG, 2017. "The Risk Contagion Effect of Return Volatility between China’s Offshore and Onshore Foreign Exchange Market," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 5-21, December.
    • Handle: RePEc:rjr:romjef:v::y:2017:i:4:p:5-21
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    References listed on IDEAS

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    Cited by:

    1. Binghui Wu & Tingting Duan, 2019. "Nonlinear Dynamics Characteristic of Risk Contagion in Financial Market Based on Agent Modeling and Complex Network," Complexity, Hindawi, vol. 2019, pages 1-12, June.

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    More about this item

    Keywords

    risk contagion effect; impulse response; VAR model; overall contagion model; time-varying contagion model;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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