Abstract
In recent years the Chinese foreign exchange rate policy and the internationalization of Chinese renminbi (RMB) have been hotly debated both in the academic world and in practice as the growing weight of China’s foreign trade and investment flows in the world economy. Most of the existing studies tend to review the process and impact of the RMB internationalization issues. The great interest of RMB internationalization is probably with financial institutions doing international business in the currency and also the Chinese firms conducting international business. This paper examines the impact of public information flows on the volatility of the Chinese RMB spot and non-deliverable forward (NDF) exchange rates using a regime-switching framework. Two major types of news items – articles that report on the RMB and those that report on the US dollar (USD) – are used to measure information flows. The results indicate that the impact of news flows is more significant in the calm (low volatility) regime rather than in the turbulent (high volatility) regime. These findings have important implications for policy-makers in both the public and private sectors and for business firms who wish to hedge their exposures.
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Notes
- 1.
The reason for using the Student-t distribution assumption of the residuals rather than the Normal distribution is that the former can accommodate the excess kurtosis of the innovations (Bollerslev 1987). Besides, Susmel and Engle (1994) point out the importance of using t-distribution for more efficient estimation than Normal distribution.
- 2.
Altogether RavenPack provides five general news categories (Business, Economy, Environment, Politics and Society) and many subcategories. In our research, news variables are constructed from the subcategories “Chinese Renminbi” and “U.S. Dollar” of Economy category. Although pointed out by Liu and Pauwel (2012), political news can also affect conditional volatility of exchange rate return, the corresponding number of news stories in RavenPack is very small. Therefore, we exclude the Politics category.
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Ho, KY., Shi, Y., Zhang, Z. (2015). Public News Flows and Chinese Renminbi: A Volatility Regime-Switching Analysis. In: Djajadikerta, H., Zhang, Z. (eds) A New Paradigm for International Business. Springer Proceedings in Business and Economics. Springer, Singapore. https://doi.org/10.1007/978-981-287-499-3_6
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