Paul McNelis (Fordham University): Off-Shore Fears and On-Shore Risk: Exchange-Rate Pressures and Bank Volatility in China
Co-author: Jennifer Lai (Guangdong University of Foreign Studies)
This research project assesses the effects of news and signals in the off-shore CNH spot market for Chinese currency on the volatility of share prices of Chinese banks and the overall risks of Chinese banking stability.We make use of variance decomposition methods and financial connectedness measures from Vector Autoregressive (VAR) model estimation with machine-learning methods based on LASSO estimation. Our results show that volatility measures of the offshore CNH market account for over fifty-percent of the share-price volatility forecast-errors of sixteen major banks, during times of off-shore fears, specifically at the time of the downgrading of the US debt, and later, in the period of the Brexit process and the start of US-China trade frictions. The CNH market volatility has practically identical contagion effects on the Big Five banks as well as on the National-city-rural banks not subject to Basel 3 accords. By contrast, the feedback contagion effect from the banks to the offshore CNH market differ markedly between the Big Five banks and the National-city-rural banks. Our results suggest that further movements in the offshore exchange markets, coming from off-shore news such as increasing trade frictions with the United States, will generate greater volatility in the Chinese banking sector and will call for greater macro and micro prudential regulation.
BOFIT seminars are open to all researchers interested in the subjects covered. Those wishing to attend a seminar are kindly asked to register in advance, by email bofit(at)bof.fi or tel. +358 9 183 2268.
Seminars take place, as a rule, on Tuesdays, starting at 10.30 a.m. Visitors are escorted to the seminar room from the Rauhankatu 19 B (Library) entrance.