Empirical Research on the Dynamic Correlation between SHIBOR and NDF Implied Interest Rate

Unlike exist study on the spill-over effect between RMB exchange rate and interest rate, this paper is the first study on the spill-over effect between money market and RMB NDF market. Two multivariate GARCH models including diagonal VEC and BEKK are employed to analyze the dynamic correlation between SHIBOR and Non-deliverable forward implied interest rate (NDF IR). Two short-term interest rates with maturity of 1-week and 3-month are studied here. The results show that there exists dynamic correlation between NDF IR and SHIBOR. In term of volatility, 3-month NDF IR shows significant time varying variance characteristic and volatility persistence, and affects 3-month SHIBOR more significant than the effect on 1-week SHIBOR by 1-week NDF IR On the contrary, SHIBOR has little effect on NDF IR. 3-month SHIOR and NDF IR shows strong co-movement, but weak between the term of 1-week By studying the relationship between NDF IR and SHIBOR, we conclude that RMB NDF has a strong spill-over effect on Chinese money market, especially on 3-month market.