An Analysis of China’s Onshore and Offshore Exchange Rates—Adjusted Thermal Optimal Path Approach Based on Pruning and Path Segmentation

摘要

The study of the lead-lag relationship between the Hong Kong offshore Renminbi (CNH) spot market and onshore (CNY) spot market is of great importance for its wide application in market risk management. In this paper, we study the correlation between the CNH and CNY spot markets in the contexts of daily closing price change and the 2011–2016 Bid-Ask spread (BAS). We test the existence of causality relation between CNH/CNY pairwise change and BAS by using the conventional method of vector auto-regression (VAR) model in the observation period. Furthermore, we detect the local lead-lag dependence relationships between CNH/CNY pairwise change and BAS by using a non-parametric approach-adjusted Thermal Optimal Path (TOP) method. Through introducing a Pruning and Path segmentation algorithm, we address the problem of computation infeasibility that may be encountered in application of the existing TOP method for the detection of lead-lag relationship between two time series with long time duration. Theoretical analyses and simulation results are presented to verify validity of adjusted TOP method in the setting of big time-series data set. This study also provides some interesting findings: (1) the offshore CNH market is informationally integrated with the onshore CNY market from two aspects of closing price change over two consecutive single days and BAS used as a proxy for market liquidity; (2) Local dependency between the two markets changes with economic conditions changing, which would facilitate both investor and policy maker decision making.