Chinese Currency Exchange Rates Analysis: Risk Management, Forecasting and Hedging Strategies

110 Pages·2017·2.8 MB·English

by  Jiangze Du, Jying-Nan Wang, Kin Keung Lai, Chao Wang

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Chinese Currency Exchange
Rates Analysis
This book provides an overview of Chinese RMB exchange markets and
risk management strategies. The view that the RMB is playing an increas-
ingly international role has been widely accepted by practitioners as well
as scholars worldwide. Moreover, the Chinese government is opening up
control of the RMB exchange market, step by step. However, some related
topics are under heated debate, such as how to manage and warn of the cur-
rency crisis, what the trend of the RMB exchange rate in the future is, and
how to hedge the exchange risk in the process of RMB internationalization.
In this book, we will give distinct answers to the above questions.
Jiangze Du is currently Assistant Professor of Finance and Economics at
Jiangxi University in China. He obtained his PhD in Management Sciences
from City University of Hong Kong in 2015. He specializes in financial time
series analysis and financial risk management.
Jying-Nan Wang is currently Professor of Posts and Telecommunications
at Chongqing University in China. He obtained his PhD in the Graduate
School of Management, Yuan Ze University in 2008. Dr. Wang’s research
interests are in market microstructure, volatility estimation, and risk
management.
Kin Keung Lai received his PhD at Michigan State University, USA. He is
currently Professor of Industrial and Manufacturing Systems Engineering
at The University of Hong Kong. Professor Lai’s main areas of research are
operations and supply chain management, as well as financial and business
risk analysis.
Chao Wang is currently a PhD candidate in the Department of Management
Sciences at City University of Hong Kong. He received his Master’s Degree
of from Texas A&M University, USA. Chao Wang’s main research areas
are financial time series analysis and financial risk management.
Routledge Advances in Risk Management
Edited by Kin Keung Lai and Shouyang Wang
For a full list of titles in this series, please visit www.routledge.com/
Routledge-Advances-in-Risk-Management/book-series/RM001
Information Spillover Effect and Autoregressive Conditional
Duration Models
Xiangli Liu, Yanhui Liu, Yongmiao Hong and Shouyang Wang
Emerging Financial Derivatives
Understanding exotic options and structured products
Jerome Yen and Kin Keung Lai
Operational Risk Management in Container Terminals
Eric Su, Edward Tang, Kin Keung Lai, Yan Pui Lee
Managing Currency Options in Financial Institutions
Vanna–Volga method
Yat-Fai Lam and Kin-Keung Lai
Gold and International Finance
The gold market under the internationalization of RMB in Hong Kong
Haywood Cheung
Green Transportation and Energy Consumption in China
Jian Chai, Ying Yang, Quanying Lu, Limin Xing, Ting Liang, Kin Keung
Lai and Shouyang Wang
Chinese Currency Exchange Rates Analysis
Risk Management, Forecasting, and Hedging Strategies
Jiangze Du, Jying-Nan Wang, Kin Keung Lai, and Chao Wang
Chinese Currency Exchange
Rates Analysis
Risk Management, Forecasting, and
Hedging Strategies
Jiangze Du, Jying-Nan Wang, Kin
Keung Lai, and Chao Wang
First published 2018
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
711 Third Avenue, New York, NY 10017
Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2018 Jiangze Du, Jying-Nan Wang, Kin Keung Lai, and Chao Wang
The right of Jiangze Du, Jying-Nan Wang, Kin Keung Lai, and Chao Wang to be
identified as authors of this work has been asserted by them in accordance with
sections 77 and 78 of the Copyright, Designs and Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or utilised
in any form or by any electronic, mechanical, or other means, now known or hereafter
invented, including photocopying and recording, or in any information storage or
retrieval system, without permission in writing from the publishers.
Trademark notice: Product or corporate names may be trademarks or registered
trademarks, and are used only for identification and explanation without intent to
infringe.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data
A catalog record for this book has been requested
ISBN: 978-1-138-04126-4 (hbk)
ISBN: 978-1-315-17221-7 (ebk)
Typeset in Times New Roman
by diacriTech, Chennai
Contents
List of figures vii
List of tables ix
Preface xi
1 Chinese currency exchange market:
An overview 1
2 Interrelationship between RMB markets 13
3 Chinese exchange market crisis: Warning
and identification based on Markov regime
switching model 25
4 Forecasting the renminbi exchange rate with
an EMD-based neural network 37
5 Hedging currency risk 61
References 90
Index 94

Figures
1.1 GDP in major countries. 2
1.2 GDP of the United States and China based on PPP. 2
1.3 The evolution of the Chinese yuan exchange rate regime. 4
1.4 The fixed exchange rate regime in the command
economy period. 5
1.5 The dual-track system in the economy transition period. 6
1.6 Managed floating exchange rate regime in the market
mechanism period. 7
1.7 The divisions of the Chinese FX market. 9
1.8 The features of the interbank FX market. 10
1.9 The features of the offshore FX market in Hong Kong. 12
2.1 Flowchart for analysis of time series about equilibrium
relationship. 15
2.2 CNH, CNY, and NDF daily settlement exchange rate. 17
2.3 Impulse response of CNH, CNY, and NDF. 22
3.1 CNY and CNH series. 33
3.2 Results of MS model estimation. 34
3.3 Results of EMD-MS model estimation. 35
4.1 An artificial neural network structure. 40
4.2 An example of EMD(-1)-MLP model. 45
4.3 An example of EMD(-1)-MLP* model. 46
4.4 The EMD decompositions of CNY. 47
4.5 The EMD decompositions of CNH. 48
5.1 The RMB deposits in Hong Kong from 2010 Q4
to 2015 Q2. 62
5.2 Time trends in CNY and CNYF. 75
5.3 Time trends in CNH and CNHF. 76
5.4 Efficient frontiers of fully hedged and unhedged portfolios. 86
5.5 Time trends in rolling Sharpe ratios. 87
5.6 Annualized economic benefit of fully hedged portfolio. 87

Tables
2.1 ADF unit root test on CNY, CNH, and NDF. 18
2.2 Intermediate ADF test results. 18
2.3 ADF unit root test on D(CNY), D(CNH), and D(NDF). 18
2.4 Johansen cointegration test on CNH, CNY,
and NDF. 19
2.5 VAR lag order selection criteria. 20
2.6 Vector autoregression estimates. 20
2.7 Granger causality tests. 23
3.1 MS model estimation for CNY. 34
3.2 EMD-MS model estimation for CNY. 35
4.1 The MSE comparisons for different models. 50
4.2 The D comparisons for different models. 52
stat
4.3 The MSE comparisons for CNY and CNH. 53
4.4 The D comparisons for CNY and CNH. 54
stat
4.5 Performance of trading strategy with τ = 0%
based on EMD-MLP. 56
4.6 Performance of trading strategy with τ = 0.5%
based on EMD-MLP. 57
4.7 Performance of trading strategy with τ = 1%
based on EMD-MLP. 58
5.1 Dataset description and source. 71
5.2 List of the exchange traded funds considered. 73
5.3 Summary statistics for weekly CNY, CNYF,
CNH, and CNHF returns. 77
5.4 Sharpe ratios for equal-weighted portfolios. 79
5.5 Economic benefit for equal-weighted portfolios. 81
5.6 Sharpe ratios for optimal-weighted portfolios. 83
5.7 Economic benefit for optimal-weighted portfolios. 84