textIn order to hedge efficiently, persistently high negative covariances or, equivalently,
correlations, between risky assets and the hedging instruments are intended to mitigate against
financial risk and subsequent losses. If there is more than one hedging instrument, multivariate
covariances and correlations will have to be calculated. As optimal hedge ratios are unlikely to
remain constant using high frequency data, it is essential to specify dynamic time-varying
models of covariances and correlations. These values can either be determined analytically or
numerically on the basis of highly advanced computer simulations. Analytical developments
are occasionally promulgated for multivariate conditional volatility models. The primary
purpose of the paper is to analyse purported analytical developments for the only multivariate
dynamic conditional correlation model to have been developed to date, namely Engle’s (2002)
widely-used Dynamic Conditional Correlation (DCC) model. Dynamic models are not
straightforward (or even possible) to translate in terms of the algebraic existence, underlying
stochastic processes, specification, mathematical regularity conditions, and asymptotic
properties of consistency and asymptotic normality, or the lack thereof. The paper presents a
critical analysis, discussion, evaluation and presentation of caveats relating to the DCC model,
and an emphasis on the numerous dos and don’ts in implementing the DCC and related model
in practice

What They Did Not Tell You About Algebraic (Non-)Existence, Mathematical (IR-)Regularity and (Non-)Asymptotic Properties of the Dynamic Conditional Correlation (DCC) Model

The sound and sustainable development of the international monetary system is the cornerstone of the sound and stable development of the global economy. This paper takes digital currency in China as its research object and utilizes a regime-switching transition auto-regression (STAR) model and nonlinear time-varying parameter–stochastic volatility–vector auto regression (TVP-SV-VAR) model to empirically analyze the relationship between digital RMB, RMB internationalization, and the development of the international monetary system. The results show that the relationship between DC/EP and the internationalization of the RMB is time-varying, with the above relationship being significantly different in various economic situations. DC/EP can boost the internationalization of the RMB, and thereby contribute to the diversification of the international monetary system. The results have important policy implications for the sound and sustainable development of economic and financial markets.

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Digital RMB, RMB Internationalization and Sustainable Development of the International Monetary System

As the world’s largest exporter and second-largest importer, China has made exchange rate stability a top priority for its economic growth. With development over decades, however, China now holds excess dollar reserves that have suffered a huge paper loss because of quantitative easing in the United States. In this reality, China has been provoked into speeding RMB internationalization as a strategy to reduce the cost and get rid of the excessive dependence on the US dollar. Thus, this study attempts to investigate the volatility contagion effect and dynamic conditional correlation among four assets, namely China’s onshore exchange rate (CNY), China’s offshore exchange rate (CNH), China’s foreign exchange reserves (FER), and RMB internationalization level (RGI). Considering the huge changes before and after China’s “8.11” exchange rate reform in 2015, we separate the period of study into two sub-periods. The Diagonal BEKK-GARCH model is employed for this analysis. The results exhibit large GARCH effects and relatively low ARCH effects among all periods and evidence that, before August 2015, there was a weak contagion effect among them. However, after September 2015, the model validates a strengthened volatility contagion within CNY and CNH, CNY and RGI, and CNH and RGI. However, the contagion effect is weakened between FER and CNY, FER and CNH, and FER and RGI.

Roengchai Tansuchat

Papers

The Conflicting Developments of RMB Internationalization: Contagion Effect and Dynamic Conditional Correlation