The evolution of the relationship between onshore and offshore RMB markets under asymmetric volatility spillovers

Abstract

The exchange rate system in China is unique, as onshore and offshore markets exist for a single currency. This paper investigates the evolution of information transmission for each market and explores their relative roles in driving price discovery and volatility spillovers as the RMB becomes more market oriented. We find that onshore returns and volatilities are increasingly influenced by the offshore market, with differences across various exchange rate policy phases. Using a novel method to capture asymmetric spillovers, the findings also show that the volatility of the onshore market is much more susceptible to offshore shocks when the RMB depreciates. To determine the factors influencing the strength of volatility spillovers, we provide additional regression analysis. The results show that capital flows and the degree of intervention are important determinants of information flows under unexpected RMB weakness in recent samples.