DAILY EXCHANGE RATE BEHAVIOUR OF SPECIAL DRAWING RIGHTS PER YUAN

-Dr.Debesh Bhowmik 

Key words- SDR Yuan exchange rate, Autoregressive model,ARIMA model,GARCH model,volatility of exchange rate

JEL-C22,C52,F3,F31

Summery

After the inclusion of Yuan in SDR, the paper scrutinizes the daily exchange rate behavior of SDR per Yuan from 1/12/2015 to 16/2/2016 because monetarists predicted that RMB will be more volatile. The paper conducted to find out semilog trend values of exchange rate including residuals test for serial correlation, heteroscedasticity, autocorrelation and coefficient test for confidence ellipse. The paper verified the autoregressive models at lag one and three for which visibility of autocorrelations were also tested. Even, Box and Pierce(1970) ARMA model is estimated for stationary and stability of the series. Finally, to test volatility the ARCH test has been done including GARCH, and its conditional variance following Bollerslev(1986).The structural break was tested by Bai-Perron model(2003).

The paper showed that the estimated semilog linear  model of the daily exchange rate of SDR per Yuan during 1/12/2015 to 16/2/2016 showed that the exchange rate has been decreasing at the rate of 0.0697% per day which is statistically significant.

The paper showed that the exchange rate is declining, showing stationary and stability but marginal volatility is observed in the ARCH and GARCH models that can be minimized if China slowly and steadily introduce the capital account convertibility and financial sector reform including Yuan internationalization and if China can integrate policy of shore price and onshore pricing.

The sequential F statistic of break test are significant at 5% level which are shown in Table where repartitions were observed at 8,18,26 observations respectively.

After the declaration of the inclusion of RMB in SDR basket in November,2015, the SDR per Yuan is marginally depreciated with US Dollar which follows naturally with spot market rate with SDR and the more volatility was observed since then as predicted by the monetarists. But, the above models showed that those errors can be minimized through good management technique of stabilising exchange rate policy which can be helpful through new liberalized interest rate policy of PBC which can increase offshore and onshore liquidity and minimize their price differences, can follow convergence of forex market, can do more swapping, speed up 20-20 development strategy, introduce macro prudential management, to increase more RMB payments centers, increase linkages between offshore and onshore markets, and increase scope of FTA and so on. To face the absolute gap between RMB fixing and the previous trading day close , the investors can use HKEx’S USD/CNH futures based upon their trading preferences and investment objectives, either as a cost efficient risk management tool to hedge against RMB price risk, to capitalize on short term trading opportunities, or to exploit price discrepancy across the offshore and onshore markets.

The paper concludes that the SDR per Yuan daily exchange rate is not much volatile as has been found from several models studied here and the fear about volatility due RMB inclusion in SDR might be media effect and is not justified because China had already liberalized interest rate and depreciated RMB recently by about 6% that could not boost the volatility of the exchange rate abnormally rather the process of capital account convertibility and measures on Yuan internalization have been continuing speedily. Yet, China has to face competition in the freely floating exchange rate and interest rate with US Dollar and Euro in commodity, money, capital and stock markets respectively where it will have to increase its market capitalization and turn over. 

PUBLISHED IN FAME,VOLUME-2,MARCH 2017,THE JOURNAL OF FINANCE,ACCOUNTING,MANAGEMENT AND ECONOMICS,

SHRI SHIKSHAYATAN COLLEGE ,DEPARTMENT OF COMMERCE

KOLKATA