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Comments on “The Offshore Renminbi Exchange Rate …” by Cheung and Rime

Comments on “The Offshore Renminbi Exchange Rate …” by Cheung and Rime. Andrew K. Rose Berkeley-Haas, NBER, CEPR, ABFER. “Sargent” Critique Gone Wild. Sargent: Empirical Success requires regressing prices on prices or quantities on quantities Mixing Ps and Qs spells doom

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Comments on “The Offshore Renminbi Exchange Rate …” by Cheung and Rime

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  1. Comments on “The Offshore Renminbi Exchange Rate …”by Cheung and Rime Andrew K. Rose Berkeley-Haas, NBER, CEPR, ABFER Rose on Cheung and Rime

  2. “Sargent” Critique Gone Wild • Sargent: Empirical Success requires regressing prices on prices or quantities on quantities • Mixing Ps and Qs spells doom • Microstructure Regressions an Exception • Evans and Lyons: Order Flow drives Prices • Same seems true here • But is that what’s really going on? Rose on Cheung and Rime

  3. Microstructure Seems to Work OK • Tables 1, 3: Order Flow Contributes a Lot • Must be contemporaneous; even one-day lag hurts a lot (Tables 2,3,5a) • Less Success with Limit-Order Flow • Usual macro suspects contribute little • Lags, interest differentials • But volatility – also macro – works strikingly well • Highly significant, quite robust finding • A general result? Rose on Cheung and Rime

  4. Minor Bitching • Lots of typos, grammatical mistakes … • Level of Order Flow is usually denoted ΔX (confusing), except when denoted X • Some key text omissions (e.g., data frequency) • Some potentially important data omissions (e.g., order flow volume, trading band limits) • Potentially important for explaining time-variation • Too many results Rose on Cheung and Rime

  5. Abrupt Change in ECM Strategy • ECMs in Tables 2, 3 link spot offshore rate to order flow and interest differentials • Not very successful • ECMs in Tables 4, 5, 6 links onshore rate to offshore rate: • CNY = 1.0735 CNH • Fits well but … really? Rose on Cheung and Rime

  6. Hard to Take Latter ECM Seriously • Why isn’t coefficient on offshore rate 1? • Insignificantly different from 1 • Economically sensible to differ from 1? • Either way, this seems like an odd model • Are other results affected? Rose on Cheung and Rime

  7. A Little Smelly • Big jump in explanatory power from cols (7) to (8) in Table 5b • Why? Δonshore regressed on Δfix • Close to y on y? • No: coefficient of .6, R2<<1 • Why so low? Rose on Cheung and Rime

  8. “Multicollinearity” An Issue? • Another big jump in explanatory power between cols (8) to (9) in Table 5b • Why? (Pt-Ht-1) added in addition to ECM • But ECM is (Yt-1.07Ht-1) • Close to having same regressor twice? • Again, what’s going on? Rose on Cheung and Rime

  9. Is PBoC Fix Data Reliable? Rose on Cheung and Rime

  10. Differences Really this Large? Rose on Cheung and Rime

  11. Summing Up • Easy to Replicate • Some Disappointments • Ex: Little Success with Limit-Order • Some Less Interesting Results • Confirmations on Order Flow, Interest Differential • Implausible VECM results • Questionable data on fix • Striking Strong Result on Volatility • Would like to check with other currencies • Fundamentally Interesting Question: More, Please! Rose on Cheung and Rime

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