Connectedness of the Asia Pacific forex markets: China's growing influence
Abstract
This paperinvestigates the degree of connectedness of Asia Pacific forex markets postglobal financial crisis and relates it to developments in the renminbi markets.The connectedness measure developed by Diebold and Yilmaz (2014) reveal thestrength of linkages across the US dollar currency pairs of twelve currencies,namely offshore renminbi, onshore renminbi, euro, yen, Australian dollar, Indian rupee,Korean won, Malaysian ringgit, New Zealand dollar, Singapore dollar, Thai bahtand Taiwan dollar. With the gradualliberalization of China’s exchange rate system, shocks from the renminbimarkets contribute more to fluctuations in almost all individual Asia Pacificcurrency markets vis-a-vis the yen. Rolling regressions show a number of AsiaPacific currencies exhibit tighter association with the renminbi when thelatter underwent exchange rate regime reform. Finally, results from a two-stepanalysis involving a panel regression provide evidence that time-varyingsensitivities of Asia Pacific currencies to the renminbi are directly relatedto the countries’ trade and financial links with China.