Asymmetry and Non-Normality in the Dynamics of Onshore and Offshore Renminbi Markets

This paper implements a novel approach that allows for asymmetry in volatilities and idiosyncratic deviations from normality to address distinct features in the evolving relationship between onshore and offshore RMB exchange rate returns. Against a backdrop of growing integration since 2015, the findings show that onshore returns and volatilities are increasingly influenced by the offshore market. The results also isolate consequential differences in distributional parameters, with an implied kurtosis that is markedly lower in onshore markets relative to offshore counterparts. Most importantly, the findings demonstrate that asymmetry is an increasingly relevant feature of volatility dynamics, with vital implications for spillover impacts. Specifically, a full set of computed volatility impulse response functions reveal that the onshore market is much more susceptible to offshore shocks under an RMB depreciation. The findings demonstrate that policy makers must be mindful of external shocks that can lead to internal instability, particularly as the RMB weakens unexpectedly in offshore markets