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The price discovery in the renminbi/USD market: Two spot, two swap, and three forward FX rates

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  • Kitamura, Yoshihiro

Abstract

This paper employs the vector error correction model (VECM) to measure the contribution of the onshore renminbi spot foreign exchange (CNY) rate to the price discovery of the offshore one (CNH). The VECM incorporates the covered interest rate parity condition by introducing the forward swap rate. Each rate has onshore and offshore markets, and the VECM encompasses the seven variables. This rich VECM challenges the small VECM with only two CNH and CNY rates, revealing an overstatement of the CNH's contribution. Additionally, CNY and CNH are the main contributors to the price discovery of the forward exchange rates. When the central parity is set to be weaker than the previous day's closing of the CNY, the CNY is dominant over the CNH in terms of the information share in the spot FX rate. This effect is amplified after the month of sluggish Chinese exports.

Suggested Citation

  • Kitamura, Yoshihiro, 2024. "The price discovery in the renminbi/USD market: Two spot, two swap, and three forward FX rates," International Review of Financial Analysis, Elsevier, vol. 95(PA).
    • Handle: RePEc:eee:finana:v:95:y:2024:i:pa:s1057521924002941
    DOI: 10.1016/j.irfa.2024.103362
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    More about this item

    Keywords

    Information share; Price discovery; Renminbi foreign exchange rate;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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