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Renminbi Revaluation, Euro Appreciation and Chinese Markets: What Can We Learn From Data?

Author

Listed:
  • Paul D. McNelis

    (Fordham University)

  • Salih N. Neftci

    (City University of New York)

Abstract

This paper examines financial market data to assess the likelihood of renminbi revaluation and its implications for Chinese share price increases, given the continuing appreciation of the Euro against the U.S. dollar. We find that the 3-month non-deliverable forward premia are key series linking these variables. The forward premia predict series A share-price changes, while Euro/US dollar exchange rates in turn predict foreward-premia. Bayesian models outperform standard linear models for forecasting performance.

Suggested Citation

  • Paul D. McNelis & Salih N. Neftci, 2006. "Renminbi Revaluation, Euro Appreciation and Chinese Markets: What Can We Learn From Data?," Working Papers 012006, Hong Kong Institute for Monetary Research.
  • Handle: RePEc:hkm:wpaper:012006
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    References listed on IDEAS

    as
    1. Raffaella Giacomini & Halbert White, 2006. "Tests of Conditional Predictive Ability," Econometrica, Econometric Society, vol. 74(6), pages 1545-1578, November.
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    3. Franses,Philip Hans & Dijk,Dick van, 2000. "Non-Linear Time Series Models in Empirical Finance," Cambridge Books, Cambridge University Press, number 9780521770415.
    4. Chao, John & Corradi, Valentina & Swanson, Norman R., 2001. "Out-Of-Sample Tests For Granger Causality," Macroeconomic Dynamics, Cambridge University Press, vol. 5(04), pages 598-620, September.
    5. Inoue, Atsushi & Kilian, Lutz, 2006. "On the selection of forecasting models," Journal of Econometrics, Elsevier, vol. 130(2), pages 273-306, February.
    6. 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.
    7. Brock, W.A. & Dechert, W.D. & LeBaron, B. & Scheinkman, J.A., 1995. "A Test for Independence Based on the Correlation Dimension," Working papers 9520, Wisconsin Madison - Social Systems.
    8. Hamilton, James D., 1990. "Analysis of time series subject to changes in regime," Journal of Econometrics, Elsevier, vol. 45(1-2), pages 39-70.
    9. Norman R. Swanson, 2000. "An Out of Sample Test for Granger Causality," Econometric Society World Congress 2000 Contributed Papers 0362, Econometric Society.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Prediction; Bayesian forecasting; Granger tests of causality; nested models;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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