Connectedness of Asia Pacific forex markets: China's growing influence

• Main Author: CHOW, Hwee Kwan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2021
• Subjects: Asia Pacific forex markets; connectedness; onshore and offshore renminbi; Asian Studies; Finance; Macroeconomics
• Online Access: https://ink.library.smu.edu.sg/soe_research/2401; https://ink.library.smu.edu.sg/context/soe_research/article/3400/viewcontent/Connectedness_AP_Forex_Markets_2020_av.pdf
• Institution: Singapore Management University

This paper investigates the degree of connectedness of Asia Pacific forex markets post global financial crisis and relates it to developments in the renminbi markets. The connectedness measure developed by Diebold and Yilmaz (2014) reveal the strength of linkages across the US dollar currency pairs of twelve currencies, namely offshore renminbi, onshore renminbi, euro, yen, Australian dollar, Indian rupee, Korean won, Malaysian ringgit, New Zealand dollar, Singapore dollar, Thai baht and Taiwan dollar. With the gradual liberalization of China’s exchange rate system, shocks from the renminbi markets contribute more to fluctuations in almost all individual Asia Pacific currency markets vis-a-vis the yen. Rolling regressions show a number of Asia Pacific currencies exhibit tighter association with the renminbi when the latter underwent exchange rate regime reform. Finally, results from a two-step analysis involving a panel regression provide evidence that time-varying sensitivities of Asia Pacific currencies to the renminbi are directly related to the countries’ trade and financial links with China.