Comments on “The Offshore Renminbi Exchange Rate …” by Cheung and Rime Andrew K. Rose Berkeley-Haas, NBER, CEPR, ABFER Rose on Cheung and Rime1

“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 Rime2

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 Rime3

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 Rime4

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 = CNH – Fits well but … really? Rose on Cheung and Rime5

Hard to Take Latter ECM Seriously 1.Why isn’t coefficient on offshore rate 1? – Insignificantly different from 1 – Economically sensible to differ from 1? 2.Either way, this seems like an odd model – Are other results affected? Rose on Cheung and Rime6

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, R 2 <<1 Why so low? Rose on Cheung and Rime7

“Multicollinearity” An Issue? Another big jump in explanatory power between cols (8) to (9) in Table 5b – Why? (P t -H t-1 ) added in addition to ECM But ECM is (Y t -1.07H t-1 ) Close to having same regressor twice? Again, what’s going on? Rose on Cheung and Rime8

Is PBoC Fix Data Reliable? Rose on Cheung and Rime9

Differences Really this Large? Rose on Cheung and Rime10

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 Rime11