The Analysis of the NTD Foreign Exchange Rate Volatility and the Profitability of Foreign Exchange Management before and after the Abolishment of QFII
Date Issued
2009
Date
2009
Author(s)
Chou, Jeng-Shan
Abstract
The government recently plans to build Taiwan as Asian Asset Management Center. Attracting the overseas funds to invest in Taiwan is the cornerstone to develop asset management. If this strategy works, there will be huge amount of overseas funds flowing into Taiwan and will cause great impact on the NTD foreign exchange rate volatility, then the capability of the central bank to stabilize the NTD foreign exchange rate is very crucial. QFII was abolished in 2003 October that caused a large number of foreign exchange trading volume. However, there is no previous study focused on analyzing the influence of the reform of foreign funds management system on the NTD foreign exchange rate volatility. This thesis aims to investigate the difference on the NTD foreign exchange rate volatility between before and after the abolishment of QFII and estimate the capability of central bank in the foreign exchange market during the same period. This thesis uses the data of NTD/USD foreign exchange rate from 1999 to 2008 to analyze the difference in the NTD foreign exchange rate volatility before and after the abolishment of QFII by EGARCH and GARCH models. In addition, this thesis also estimates the profitability of central bank intervention in the foreign exchange market during the same period. he results illustrate that the volatility of NTD foreign exchange rate reveals significant clustering property, known as “ARCH effect”. The existence of significant asymmetric effect of the volatility of NTD foreign exchange rate shows that the impacts on the volatility of NTD foreign exchange rate affected by bad news (depreciation) are larger than the same magnitude of good news (appreciation). Furthermore, the estimates of QFII abolishment dummy variable are both significantly negative in EGARCH and GARCH models. The abolishment of QFII enables foreign investors to invest in Taiwan capital market which causes the trade volume of NTD foreign exchange increased. However, it did not aggravate the volatility of NTD foreign exchange rate after the abolishment of QFII in 2003 October. Moreover, this thesis also found a huge unrealized profit from official intervention during the same period in 1999–2008.fter the abolishment of QFII in 2003 October, the trade volume of NTD foreign exchange increased while the volatility of NTD foreign exchange rate decreased. In the same time, the central bank did not have losses in foreign exchange market. It dispels the doubts about the volatility of NTD foreign exchange rate when the government frames the policies and measures to boost asset management and to enhance the globalization of Taiwan financial industry. The government could have more positive attitude toward that.
Subjects
the volatility of NTD foreign exchange rate
EGARCH model
GARCH model
QFII
foreign exchange management
Type
thesis
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