Research On The Volatility Spillover Effect Between RMB Exchange Rate And Inland Port Link Funds

With the increasing marketization of the exchange rate of RMB,the degree of internationalization of the RMB under the leadership of China’s central bank is also constantly deepening.At the same time,the opening and development of the Land Port Link also provides convenience for the flow of cross-border investment funds in China.In this context,the connection between the exchange rate of RMB and foreign investment flows in the capital market is becoming increasingly close,and the fluctuation risk of foreign exchange and foreign investment is not only transmitted between the two,It will further spread to the stock market,posing a threat to the stability of China’s overall financial market.Therefore,studying the volatility spillover effect between China’s foreign exchange market and the funds of the Mainland Hong Kong Stock Connect,and analyzing the reasons for its characteristics,can provide reference for avoiding systemic risks in China’s financial market.This article focuses on the net purchases of northbound funds,cumulative net purchases of southbound funds,onshore RMB exchange rate,and offshore RMB exchange rate.The daily data from November 17,2014 to December 16,2022 is selected,with a total of 1902 sets of valid data.The spillover index model of Diebold and Yilmaz(2012)and Barunik and Krehlik(2018)is used to study the volatility spillover effect between the exchange rate of RMB and the fund flow of the Land Port Link,This model is an extension of the variance decomposition method used for prediction errors in the generalized VAR model proposed by Koop et al.(1996)and Pesaran and Shin(1998),which can determine the dynamic spillover effects between a series of variables in different time or frequency ranges through BK(2018)analysis.DY(2012)can determine the overall spillover effect and bidirectional net spillover effect of variables under static conditions,and use rolling window technology to clarify the direction and size of time-varying spillover effects between different variables.The output results include the total spillover index,net spillover index,and net pairwise spillover index under static and dynamic conditions.BK(2018)is further developed based on DY(2012),expanding its measurement range,Being able to calculate the corresponding spillover effects under different frequency ranges helps us to have a more detailed understanding of the volatility spillover information between the foreign exchange market and the fund flows of the Mainland and Hong Kong Connect,thus providing better policy guidance.Research has found that there is a significant level of volatility spillover effect between the RMB exchange rate and the fund flow of the Mainland Hong Kong Stock Connect throughout the entire sample period,and the strength of this effect varies significantly with time series changes,especially when the overall economic environment volatility intensifies,the volatility spillover effect between the two should be particularly significant;Among the four variables studied in this article,the onshore RMB exchange rate has the highest net volatility spillover effect on other markets,and the volatility spillover effects between each variable exhibit alternating characteristics over time;The degree of spillover effects generated by the lag of one’s own market is significantly greater than that brought by other markets,and the spillover effects between paired markets do not exist symmetrically;There is a two-way alternating spillover between the foreign exchange market and cross-border fund circulation,as well as between the foreign exchange market and the internal circulation of cross-border funds.From the perspective of the spillover index in the high,medium,and low frequency bands,long-term factors dominate the risk spillover between the RMB exchange rate and the liquidity of the Mainland Hong Kong Stock Connect.