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Forecasting the volatility of onshore and offshore USD/RMB exchange rates using a multifractal approach

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  • Sun, Limei
  • Xiang, Meiqi
  • Marquez, Leorey

Abstract

This paper combined the MFDFA(multifractal detrended fluctuation analysis) and MFDCCA (multifractal detrended crossing correlation analysis) with time singularity multifractal spectrum to analyze the volatility relationship between onshore and offshore USD/RMB exchange rates. We find some evidences on the volatility of onshore and offshore exchange rate:(1) The characteristics of long-term memory, multifractal properties and asymmetry all exist in the volatility of onshore and offshore exchange rates, and these characteristics appear stronger in the onshore market than in the offshore market. (2) The volatility in the onshore (CNY) market involved more forces, producing higher risk and lower market efficiency than that of the offshore (CNH) market. The empirical results of correlation study are: (1) There was a continuous positive correlation between the volatility of the onshore and offshore USD/RMB exchange rates, which manifested stronger in the spot market. (2) The responses of the onshore and offshore currency exchange rates to an external shock are different. The volatility of onshore exchange rate is more sensitive to news. When an external shock changed the fluctuation direction of the market exchange rate, this correlation disappeared and was replaced by a negative dependence. However, the negative correlation was corrected within a very short period, after which the positive correlation returned. (3) An examination of the risk properties between the onshore and offshore exchange rates showed the existence of a bidirectional conduction effect between them.

Suggested Citation

  • Sun, Limei & Xiang, Meiqi & Marquez, Leorey, 2019. "Forecasting the volatility of onshore and offshore USD/RMB exchange rates using a multifractal approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 532(C).
    • Handle: RePEc:eee:phsmap:v:532:y:2019:i:c:s0378437119310295
    DOI: 10.1016/j.physa.2019.121787
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    Citations

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    Cited by:

    1. Liang Wang & Xianyan Xiong & Ziqiu Cao, 2023. "Time-frequency volatility spillovers between Chinese renminbi onshore and offshore markets during the COVID-19 crisis," Palgrave Communications, Palgrave Macmillan, vol. 10(1), pages 1-14, December.
    2. Qin, Weiguang & Bhattarai, Keshab, 2022. "Influence of Hong Kong RMB offshore market on effectiveness of structural monetary policy in the Mainland China," MPRA Paper 111768, University Library of Munich, Germany, revised 30 Jan 2022.
    3. Kinkyo, Takuji, 2022. "The intermediating role of the Chinese renminbi in Asian currency markets: Evidence from partial wavelet coherence," The North American Journal of Economics and Finance, Elsevier, vol. 59(C).
    4. Yuan, Ying & Zhang, Tonghui, 2020. "Forecasting stock market in high and low volatility periods: a modified multifractal volatility approach," Chaos, Solitons & Fractals, Elsevier, vol. 140(C).
    5. Xu, Lei. & Hamori, Shigeyuki & Kinkyo, Takuji, 2021. "Continuous wavelet analysis of Chinese renminbi: Co-movement and lead-lag relationship between onshore and offshore exchange rates," The North American Journal of Economics and Finance, Elsevier, vol. 56(C).
    6. Jianxu Liu & Mengjiao Wang & Songsak Sriboonchitta, 2019. "Examining the Interdependence between the Exchange Rates of China and ASEAN Countries: A Canonical Vine Copula Approach," Sustainability, MDPI, vol. 11(19), pages 1-20, October.

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