Fluctuation and Reform: A Tale of Two RMB Markets

This paper investigates the exchange rate fluctuations in RMB onshore (CNY) and offshore (CNH) markets, especially the pricing differential between the two markets. Using symmetric and asymmetric generalized autoregressive conditional heteroscedastic (GARCH) models, we document four decoupling periods for these two RMB markets since the establishment of CNH market in 2010, and illustrate significant volatility clustering phenomena and leverage effect in CNH-CNY pricing differential. We also estimate the impact of government policy intervention on RMB markets, with special focus on the "August 11" Exchange Rate Reform. Our findings shed light on demystifying the intervention strategies of the central bank, measuring the efficiency of intervention, as well as testing the formation rule of CNY central parity during the transition.