Empirical Study On Price Discovery Of Spot Exchange Rate, Domestic Forward Exchange Rate And RMB NDF

Price discovery is one of the central functions of financial markets. In the market microstructure literature, it has been interpreted as, "the search for an equilibrium price", and "the incorporation of the information implicit in investor trading into market prices", and so on. As the one of the two functions of financial derivatives, price discovery is a criterion used to describe the development situation of derivative markets. As to spot exchange rate market and forward exchange rate market, the information implicated in one price level can influence one another, and this influence can show the efficiency of the markets. Generally higher efficiency the market has, the more excellent behavior of price discovery it has. The existence of price discovery function of derivatives continues as a prominent discussion among academics, regulators and practitioners, so the study has theoretical implicit and realistic implicit at the same time.This paper examines the price discovery behavior in spot exchange rate and domestic forward exchange rate and RMB non-delivery forward exchange rate(NDF) from different aspect. At first it summarizes the domestic and international theoretical models and empirical test methods about this topic. Differently this paper tests the long-term and short-term Granger causality based on error correction model, to describe both the long-term and short-term influence between different exchange rate markets. Also this paper innovatively sets up the volatility spillovers model based on the exponential general autoregressive conditional heteroskedastic (EGARCH) model, to analyses the price discovery behavior of the exchange rate markets from the view of volatility spillovers. Firstly, using co-integration techniques we find out the long-term equilibrium relationship between spot exchange rate and three-month (or one-year) term domestic forward exchange rate and RMB non-delivery forward exchange, at the same time there are different short-term influence behaviors, specially, RMB NDF of one year is the short-term Granger causality of domestic spot exchange rate and forward exchange rate of one year. Secondly, the volatility spillovers analysis shows that there are volatility spillovers between the domestic forward exchange rate and spot exchange rate each other; and they have better volatility spillovers behavior than the RMB non-delivery forward exchange rate.To sum up, the RMB NDF still has the influence on the domestic forward exchange rate and spot exchange rate. Domestic forward exchange rate needs more time to obtain the good ability of making price. On the other side, since a series of exchange rate reformations from 21, July 2005, the domestic spot exchange rate and forward exchange rate markets grow up step by step; they can withdraw the volatility of RMB NDF and represent good stability. At the same time the RMB NDF can absorb the domestic economy information; this phenomenon has some signification to regulators.