| Since December 15,2008,when postal communication,business communication and shipping communication were accessible between both sides of the Taiwan Straits,people of both sides have more and more communication with developing trading,larger scale of investment and deeper cooperation in finance area.With the development of cross-strait personnel exchanges and trading,demanding of the RMB and TWD on both sides of the Taiwan Straits is increasing.Therefore,it is an urgent problem to solve and an important project to cooperate that we must have a steady supply and exchange of the RMB and TWD.In 2012 August,the memorandum of cooperation in currency settlement between both sides of the Taiwan Straits was signed,committing to establish the currency settlement between the RMB and TWD,which marks new progress in financial cooperation.However,most of the settlement businesses on both sides of the Taiwan Straits are conducted through third party a freely convertible currency at present,which leads to twice exchange losses and phenomena that disrupt the financial order,such as underground banks and black market.Therefore,it is significant to form the direct exchange pricing mechanism between the RMB and TWD to promote the long-term trading,improve cross-strait currency settlement mechanism and standardize the financial order.Based on the economic background,this paper regards the exchange rate between the RMB and TWD as a kind of asset to price and try to explain the forward premium puzzle.This paper uses the state-price density that is divided into product of two parts,an exponential function and another function,by the decomposition of Markov process to study the exchange rate between the RMB and TWD,and makes use of three state variables which obey the process of mean reverting O-U process to explain the change of state-price density.Then we derive the relationship between the exchange rate between the RMB and TWD and the state-price density and establish the model under the condition of no arbitrage.And then,this paper describes the risk premium according to Fama’s decomposition of forward premium and explains the forward premium puzzle.Selecting the data from 2005 January to 2015 March,this paper gets state variable series by factor analysis method and estimates the other parameters of the exchange rate model by generalized method of moments.At last,substituting forward exchange rates for non-deliverable forward exchange rates,this paper takes the 1 month,3month,6month,9month and 1 year NDF exchange rates to simulate the spot exchange rates between the RMB and TWD,and analyses the risk premium series derived from the spot exchange rates simulations.The empirical results show that the exchange rate pricing model constructed in this paper can simulate the spot exchange rate between the RMB and NTD very well,and the simulation result is best by using the 1 month NDF exchange rates data.Besides,the risk premium that is related with the expected depreciation rate negatively is time-varying and has a characteristic of self correlation,which could explain the forward premium puzzle to some extent. |
