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Multiple Arbitrage Motivation and Shock Effect of Short-term Capital Flows——Dynamic Analysis Based on TVP-VAR Model
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TitleMultiple Arbitrage Motivation and Shock Effect of Short-term Capital Flows——Dynamic Analysis Based on TVP-VAR Model  
AuthorPeng Hongfeng,Tan Xiaoyu and Zhu Xiaoquan  
OrganizationEconomics and Management School of Wuhan University;Tsinghua University;; 
Key WordsShort-term Capital; Multiple Arbitrage Motivation; Shock Effects; Capital Account Liberalization 
AbstractFrom the perspective of maximizing speculative utility of short-term capital flows, this paper creates the interactions model of short-term capital flows, the spot rate, exchange rate expectation, interest rate spreads, stock price index and consumer price index ratio in the accelerating process of capital account liberalization. We construct three TVP-VAR models to empirically analyze multiple incentives of “exchange rate arbitrage”, “interest rate arbitrage” and “price arbitrage” as well as the shock effect with data from China and America. The results show the incentive formation of exchange rate arbitrage depends on both the spot rate and expectation so that the risk premium must be in a reasonable range. Interest rate arbitrage motivation always exists because of decreasing synchronization of benchmark interest rate. Motivation in the commodity market is stronger than that in the stock market. The impact of short-term capital was quite sensitive to flexibility of the exchange rate only after the exchange rate reform in 2005. The shock on Sino-US interest rate spread reflects the progressive characteristics of interest rate liberalization. Between the stock market and commodity market, the impact on price and return shows asymmetry. 
Serial NumberWP1279 
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