Currency Exposure in China under the New Exchange Rate Regime: National Level Evidence

Nie, Jing; Zhang, Zhichao; Zhang, Zhuang; Zhou, Si

Abstract

The present paper studies China's national level currency exposure since 2005 when the country adopted a new exchange rate regime allowing the renminbi (RMB) to move towards greater flexibility. Using generalized autoregressive conditional heteroskedastic and constant conditional correlation-generalized autoregressive conditional heteroskedastic methods to estimate the augmented capital asset pricing models with orthogonalized stock returns, we find that China equity indexes are significantly exposed to exchange rate movements. In a static setting, there is strong sensitivity of stock returns to movements of China's tradeweighted exchange rate, and to the bilateral exchange rates except the RMB/dollar rate. However, in a dynamic framework, exposure to all the bilateral currency pairs under examination is significant. The results indicate that under the new exchange rate regime, China's gradualist approach to moving towards greater exchange rate flexibility has managed to keep exposure to a moderate level. However, we find evidence that in a dynamic setting, the exposure of the RMB to the dollar and other major currencies is significant. For China, the challenge of managing currency risk exposure is looming greater.

Citation

Nie, J., Zhang, Z., Zhang, Z., & Zhou, S. (2015). Currency Exposure in China under the New Exchange Rate Regime: National Level Evidence. China & World Economy, 23(3), 97-109. https://doi.org/10.1111/cwe.12116

• Journal Article Type: Article
• Publication Date: May 14, 2015
• Deposit Date: May 21, 2015
• Publicly Available Date: May 14, 2017
• Journal: China and World Economy
• Print ISSN: 1671-2234
• Electronic ISSN: 1749-124X
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 23
• Issue: 3
• Pages: 97-109
• DOI: https://doi.org/10.1111/cwe.12116
• Keywords: Capital asset pricing models, Exchange rate regime, Currency exposure, Generalized autoregressive conditional heteroskedastic modeling, G3, F4, E3.
• Public URL: https://durham-repository.worktribe.com/output/1407740