Cross-Correlations between Chinese Renminbi Onshore- and Offshore-Markets: A MF-DCCA Approach

Abstract

Using multifractal detrended cross-correlation analysis (MF-DCCA), this paper studies cross-correlations between Chinese Renminbi (RMB) onshore and offshore markets. The dataset consists of 2,137 closing daily prices of exchange rates from 1 January 2005 to 9 July 2013, which covers seven major RMB offshore markets, including Australia, Brazil, Hong Kong, Korea, Malaysia, Singapore, and United Kingdom. Our empirical results suggest that the cross-correlation between Chinese Yuan and British Pound is the strongest in the short term, while the cross-correlation between Chinese Yuan and Malaysian Ringgit is the strongest in the long term. In addition to MF-DCCA approach, cross-correlation statistics test and cross-correlation coefficient are carried out to confirm the existence of cross-correlations. Further, we use rolling window method to investigate the impact of RMB exchange rate reforms on cross-correlations between onshore and offshore markets. We find that enhancement of RMB exchange rate flexibility can effectively reduce the multifractality of cross-correlations, indicating that the RMB exchange rate regime reforms have significantly improved the efficiency of the currency markets.