The Factors that Influence Exchange-Rate Risk: Evidence in China

Exchange-rate volatility plays an important role in both macroeconomic and financial development. In this paper, we measure the exchange-rate risk based on the conditional autoregressive value at risk (CAViaR). By establishing a Markov regime-switching model, we explore the factors that influence China’s exchange-rate risk in different regimes. The results show that trade balance, investor attention, and the interaction between policy uncertainty and investor attention have an asymmetric effect on exchange-rate risk in different regimes. More specifically, the impact of trade balance on exchange-rate risk has a linear trend, investor attention to exchange-rate risk is U-shaped, and the interaction between policy uncertainty and investor attention has an inverted-U-shaped effect on exchange-rate risk. Therefore, it is necessary to improve the monitoring mechanism of the exchange-rate risk regime. Specifically, when the exchange-rate risk is low, we can continue to release positive news and attract more investor attention. Under medium risk, we can promote exports by formulating supporting policies and use online tools to release accurate news to guide investors. Under a high-risk regime, while implementing the policies which encourage exports, the government should also introduce policy interventions for guiding investors to return rational expectations.