Abstract: In the current new era of comprehensive liberalization, it is urgent to clarify the mechanism of how exchange rate fluctuation and volatility affects two-way FDI. This paper integrates the RMB exchange rate, FDI and OFDI into a unified theoretical framework. Based on the dual perspective of exchange rate fluctuation and exchange rate volatility risk, we examine the time variance and the risk transfer effect between variables, and study the dynamic relationship between RMB exchange rate, FDI and OFDI and the interactive mechanism of volatility risk with ternary BEKK-GARCH timing model. The study finds that the appreciation of the RMB exchange rate fluctuation, will promote the growth of OFDI, but have no significant effect on FDI. RMB exchange rate volatility has a significant role in the increased risk of FDI, but has significant inhibitory effect on OFDI. By examining the wave conduction mechanism of the three variables, the study finds that historical RMB exchange rate volatility has the short term promotion and long-term inhibition effect on the current FDI fluctuations, and has a significant short-term and long-term inhibitory effect on the current OFDI. This study shows that in promoting a new stage of two-way opening, we should pay more attention to the use of RMB exchange rate or depreciation of the interval wave segment mechanism to promote the benign development of FDI and OFDI and optimize two-way international investment strategy.

Key words: FDI, OFDI, RMB exchange rate, ternary GARCH