A Regime switching Approach for Identifying Abnormal Fluctuation of RMB Non deliverable Forward Exchange Rate

Abstract:

The abnormal fluctuation of RMB non deliverable forward rate (NDF) was identified with Markov regime switching approach by taking the non linear characteristic of exchange rate volatility into consideration. Empirical analysis showed that around July 21th 2005 and June 19th 2010 when the central bank reformed the exchange regime, NDF exchange rate abnormally fluctuated , and immediately after the reform the appreciation expectation pressure was intensively released, which suggested that RMB exchange rate reform stabilized appreciation expectation. During the international financial crisis from the second half of 2007 to the beginning of 2009, NDF exchange rate continuously fluctuated abnormally, and the long term NDF volatility was obviously affected by “U shape” trend of USD, which indicated that the expectation of speculators was more sensitive to the impact of international financial markets. The study results define the period during which RMB appreciation pressures are accumulated and the different expectation characteristics of different market players. The stuty is of a good reference value for China’s central bank to stabilize RMB exchange rate.