This article presents a comprehensive examination of technical trading rules in the Chinese yuan-based foreign exchange market. The investigation employs daily data spanning seven years for 14 developed and 10 emerging market currencies. The analysis encompasses a vast universe of 41,660 trading rules, representing a significant expansion over the previous studies. The stepwise tests, which was employed to address the data-snooping bias, discover excess profitability in at least half of the developed and emerging currencies, implying the heterogeneous market efficiency across currencies. Our results are robust to sub-sample analysis and different parameter values of the stepwise tests.

In this paper, we show that only the systematic component of exchange rate expectations of professional investors is a strong predictor of the cross-section of currency returns. The predictability is strong in short and long horizons. The strategy offers significant Sharpe ratios for holding periods of 1 to 12 months, and it is unrelated to existing currency investment strategies, including risk-based currency momentum. The results hold for forecast horizons of 3, 12, and 24 months, and they are robust after accounting for transaction costs. The idiosyncratic component of currency expectations does not contain important information for the cross-section of currency returns. Our strategy is more significant for currencies with low sentiment and it is not driven by volatility and illiquidity. The results are robust when we extract the systematic component of the forecasts using a larger number of predictors.

The RMB exchange rate policy follows a “two-pillar” rule, with the market pillar reflecting foreign exchange market conditions and the basket pillar stabilizing the RMB index. This paper documents a clear pattern of regime-switching in the policy coefficients on the market pillar. And the regime-switching patterns are driven by macroeconomic variables, the intraday market condition as well as the news on trade conflicts. In a Markov-switching rational expectations model, we demonstrate that regime-switching rules expand the policy parameter’s space over which a unique equilibrium exists and the self-fulfilling depreciation is ruled out. Thus, this paper rationalizes the use of counter-cyclical factor— a policy tool proposed to stabilize the RMB exchange market.

To construct the foreign exchange market defense line, I propose the following methods: (1) Compete for market focus, improve verbal intervention and news tactics (2) Quickly create several market-leading data that is in our control (3) Update the foreign exchange regulatory strategy, replace the original routine intervention with segmented intervention. (4) Use the anchor antidote in defending The U.S. launched the exercise as early as March 2009 organized by a team composed of the U.S. Department of Defense, the Department of Commerce, the Department of Energy, the RAND Corporation, the Peterson Institute, and Wall Street people. They took China as an imaginary enemy to conduct drills as possible conflicts would happen in the derivative and foreign exchange market in the future. If we hesitate in the construction of the foreign exchange market defense line, the damage may be on the overall situation.

In Chinese culture, digit 8 (4) is taken as lucky (unlucky). We find that the numerological superstition has a profound impact across China’s stock, bond, foreign exchange and commodities markets, affecting asset prices in both the primary and secondary markets. The superstition effect, i.e., the probability of asset price ending with a lucky (unlucky) digit far exceeds (falls short of) what would be expected by chance, is prevalent. The effect is driven by investors’ reliance on superstition as an anchor to face uncertainty in asset pricing and the overoptimism of unsophisticated investors. While the superstition effect does not lead to systemic mispricing for assets traded by sophisticated investors, it implies overpricing for assets involving more unsophisticated investors.

Different from the well established markets such as the dollar-Euro market, recent CIP deviations observed in the onshore dollar-RMB forward market were primarily caused by conversion restrictions in the spot market rather than changes in credit risk and/or liquidity constraint. This paper proposes a theoretical framework under which the Chinese authorities impose conversion restrictions in the spot market in an attempt to achieve capital flow balance, but face the tradeoff between achieving such balance and disturbing current account transactions. Consequently, the level of conversion restriction should increase with the amount of capital account transactions and decrease with the amount of current account transactions. Such conversion restriction in turn places a binding constraint on forward traders’ ability to cover their forward positions, resulting in the observed CIP deviation. More particularly, the model predicts that onshore forward rate is equal to a weighted average of CIP-implied forward rate and the market’s expectation of future spot rate, with the weight determined by the level of conversion restriction. As a secondary result, the model also implies that offshore non-deliverable forwards reflect the market’s expectation of future spot rate. Empirical results are consistent with these predictions.

Following the successful experience of USDX, this paper gives a profile of how to design a foreign exchange index for China and elaborates three functions and implications of CNYX in foreign exchange market. This paper also demonstrate the models to get the equilibrium price of CNYX derivatives. CNYX derivatives provide traders and hedgers with a tool for avoiding risk and give a new approach for China’s large foreign reserve to optimize its structure to prevent the devaluation.

This study employs the Gerneralised Autoregressive Conditional Heteroskedasticity (GARCH) model to investigate the sensitivity of Chinese bank stock returns to market, interest rate and foreign exchange rate risks. Daily data are used to model these risks over the period 2007 to 2010. The results suggest that market risk is an important factor of Chinese bank stock returns, along with foreign exchange risk. However, interest rates risk tends to be insignificant factors in Chinese bank equity pricing process over the period considered.

In order to examine the new RMB exchange rate regime rigorously, we employ the STARTZ model to investigate the behavior of RMB NEER from June 1, 2006 to May 30, 2008, We find that a managed float with a target central parity and without an explicit band best describes the daily movement of the exchange rate between RMB and a basket of currencies. We also find some peculiar attributes of the RMB NEER such as small conditional variance and stronger effects of government interventions in foreign exchange market.

This paper studies the optimal scale and asset allocation of Sovereign Wealth Fund (SWF), taking China’s SWF as an example. We use the AR (1) process to simulate the future foreign exchange earnings of China and generate three patterns of the future earnings. With these three scenarios and based on Deaton’s precautionary saving model, we find that the optimal scale and asset allocation of China’s SWF mainly depend on the expected trend and fluctuation of the future foreign exchange earnings and expected yields that SWF can get. When foreign exchange earnings shows an upward trend, the scale of SWF should not be expanded even the expected investment yield is very high, and ratio of risky assets should be kept stable and high. When foreign exchange earnings is stabilized as its growth rate slows down, the scale of SWF has the positive correlation with the degree of earnings fluctuation and expected yield of investment, and also ratio of risky assets is generally lower. When foreign exchange earnings decrease, the scale of SWF should be expanded even the expected investment yield is not so high, and the ratio of risky assets is dependent on the characteristics of expected investment yields. We also conclude that investment policy of China’s SWF should follow Temasek’s investment model, under the current trend of China’s foreign exchange trend, and strive for high yield investment chances.