Modeling dynamics of short-term international capital flows in China: A Markov regime switching approach

In this paper, we analyze the dynamics of short-term international capital flows in China using time-varying transition probability Markov switching models. We provide empirical evidence that exchange rates may prove to be useful information variables for detecting the states of inflow or outflow. Moreover, the short-term international capital of “currency arbitrage” has high speculations. In addition, the results show that inflows and outflows last about 25 months and 4 months, respectively, and after 2007, inflows dominate the dynamics of short-term international capital.