The exchange rate return co-movements between Renminbi and other East Asian currencies under DCC-GARCH

抄録

This paper detects the exchange rate return relationships among the US dollar (USD), Renminbi (RMB) and East Asian currencies (EACs). Specially, whether the RMB and EACs became closer after the RMB shifted into a depreciation trend after January 2014. A DCC-GARCH (Dynamic Conditional Correlation Generalized Autoregressive Conditional Heteroskedasticity) model is employed in this paper in order to estimate the dynamic conditional correlations among these currencies. When we use the New Zealand Dollar (NZD) as the numeraire currency, we find the USD is still the most important currency in East Asia from a perspective of exchange return co-movement, albeit its importance declined in recent years. For the RMB, the DCC of the USD-RMB were very high during both periods. As a result, when some of the EACs got away from the USD, they were also far away from the RMB. However, when we chose the USD as the numeraire currency, we find that when the RMB shifted into a depreciation trend and became more flexible, the exchange rate return co-movements between the RMB and some of the EACs showed a rise during the second sub-sample period. When a country (region) kept close FDI and trade relations (trade surplus) with China, their currencies also fluctuated nearly with the RMB after January 2014. This co-movement can be forced by both pure market and authorities, or at least one of them. We conclude that the exchange rate integration between the RMB and EACs has been increased since the year of 2014, but still limited. The RMB had been neither a polar of East Asian exchange rate system nor a challenger to the USD.