Assessment on estimations of currency basket weights—With coefficient correction for common factor dominance

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Authors

Abstract

This paper proposes an approach to correcting parameter misrepresentation under the dominance of a common factor, a customarily overlooked phenomenon. Meanwhile, it provides a general solution to a specific regression bias, namely coefficient correction for common factor dominance in econometrics, which is commonly encountered in the research on currency interactions and co‐movements and beyond. The RMB basket weights are then scrutinized exhaustively, going through all stages of the evolving RMB regime and reforms. Correct and sensible currency basket weights are derived accordingly. It has been found that only the introduction of the central parity regime in 2015 has changed the RMB exchange rate patterns notably. The RMB market behavior and patterns virtually did not change during the prior reforms that had widened the band of daily fluctuation in the RMB exchange rate against the US dollar from 0.3% through to 2%, given the band's unique link to the US dollar.

Bibliographic note

Publisher Copyright: © 2020 The Authors. International Journal of Finance & Economics published by John Wiley & Sons Ltd.

Details

Original languageEnglish
JournalInternational Journal of Finance and Economics
Early online date1 Oct 2020
Publication statusE-pub ahead of print - 1 Oct 2020

Keywords

  • RMB, RMB regime, exchange rate