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A Hybrid Approach for Studying the Lead-Lag Relationships Between China’s Onshore and Offshore Exchange Rates Considering the Impact of Extreme Events

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Abstract

Understanding the characteristics of the dynamic relationship between the onshore Renminbi (CNY) and the offshore Renminbi (CNH) exchange rates considering the impact of some extreme events is very important and it has wide implications in several areas such as hedging. For better estimating the dynamic relationship between CNY and CNH, the Granger-causality test and Bry-Boschan Business Cycle Dating Algorithm were employed in this paper. Due to the intrinsic complexity of the lead-lag relationships between CNY and CNH, the empirical mode decomposition (EMD) algorithm is used to decompose those time series data into several intrinsic mode function (IMF) components and a residual sequence, from high to low frequency. Based on the frequencies, the IMFs and a residual sequence are combined into three components, identified as short-term composition caused by some market activities, medium-term composition caused by some extreme events and the long-term trend. The empirical results indicate that when it only matters the short-term market activities, CNH always leads CNY; while the medium-term impact caused by those extreme events may alternate the lead-lag relationships between CNY and CNH.

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Authors and Affiliations

  1. Academy of Mathematics and Systems Science, Chinese Academy of Sciences, Beijing, 100190, China

    Yunjie Wei & Shouyang Wang

  2. Center for Forecasting Science, Chinese Academy of Sciences, Beijing, 100190, China

    Yunjie Wei & Shouyang Wang

  3. Department of Management Sciences, City University of Hong Kong, Hong Kong, China

    Yunjie Wei

  4. School of Finance, Central University of Finance and Economics, Beijing, 100081, China

    Qi Wei

  5. China Great Wall Asset Management Corporation, Beijing, 100045, China

    Qi Wei

  6. International Business School, Shaanxi Normal University, Xi’an, 710119, China

    Kin Keung Lai

  7. Department of Industrial and Manufacturing Systems Engineering, Hong Kong University, Hong Kong, China

    Kin Keung Lai

Authors
  1. Yunjie Wei
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  2. Qi Wei
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  3. Shouyang Wang
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  4. Kin Keung Lai
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Corresponding author

Correspondence to Shouyang Wang.

Additional information

The research was partially supported by the National Natural Science Foundation of China under Grant Nos. 71390330, 71390331, 71390335. The first and third authors are very grateful to the National Nature Science Foundation of China for financial support to this study, the second author is supported by the Postdoctorate Programme of Centre University of Economics and Finance and the Postodctorate Programme of China Great Wall Asset Management Corporation.

This paper was recommended for publication by Editor YANG Cuihong.

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Wei, Y., Wei, Q., Wang, S. et al. A Hybrid Approach for Studying the Lead-Lag Relationships Between China’s Onshore and Offshore Exchange Rates Considering the Impact of Extreme Events. J Syst Sci Complex 31, 734–749 (2018). https://doi.org/10.1007/s11424-017-6281-7

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  • DOI: https://doi.org/10.1007/s11424-017-6281-7

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