Modeling the rmb exchange rate volatility using arch/garch models

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University of Alabama Libraries

China has reformed the RMB exchange rate regime since 2005. Before 2005, a purely fixed exchange rate policy was implemented in China. After reforming the exchange rate policy, China allows the RMB exchange rate to float under certain fluctuation range. The fluctuation band has been widened several times during the past ten years. How does the RMB exchange rate fluctuate? What does the RMB exchange rate volatility look like? Does the widening of the fluctuation band affect the RMB to USD exchange rate volatility? This thesis is devoted to explore some answers of these problems. This thesis uses a combination of theoretical and empirical analysis to study the fluctuation dynamic of RMB exchange rate against the USD by using the ARCH/GARCH models. In our analysis, five dummy variables are added in the GARCH model. The coefficients of the dummy variables can reveal the effects of the fluctuation range changes on the RMB exchange rate volatility. A few conclusions can be drawn from our analysis. The ARCH family models can well fit the clustering of RMB exchange rate volatility. By using the ARCH/GARCH models our analysis indicates that widening the exchange rate fluctuation band does affect the exchange rate volatility.

Electronic Thesis or Dissertation
Mathematics, Statistics, Economics