Empirical analysis on the volatility of RMB exchange rate return based on ARCH models

This paper establishes the models of Autoregressive Conditional Heteroskedastic(ARCH) models to study the RMB exchange rate volatility characteristic after the RMB exchange rate formation mechanism reform in 21 July 2005. We find that returns of RMB exchange rate against major currencies display volatility clustering and only the return of RMB exchange rate against EUR can reflect the real exchange rate risk. Because of the imperfectness and the speculation which are existed in our foreign exchange market, the central bank should apply a more flexible strategy to further the exchange rate system reform.