Information Flows between RMB Offshore Markets and Domestic Markets: Evidence from Non-Deliverable Forward (NDF) and Spot Markets

This paper investigates the interrelation and information flows between the CNY-USD spot and offshore, i.e., NDF, markets. We find that daily changes of the spot and NDF rates can be approximated by a MA (1)-GARCH (1, 1) model. Using the GARCH formulation, this paper tests the spillover effects in conditional mean and volatility between the spot and NDF markets. The results show that there is a mean spillover effect from the NDF market to the spot market and not the other way round, and that a volatility spillover effect exists in both directions. This means information in the offshore market is transmitted to the domestic currency market and the forward market serves an important price discovery role. This also means the domestic financial markets are influenced by the offshore markets.