Currency crisis and the forward discount bias: Evidence from emerging economies under breaks

The relationship between the Renminbi future spot return and the forward discount rate

“…We find that the unbiased hypothesis does only hold in Spring 2009 when both the spot and forward exchange rate are almost invariant. The result is congruent with previous studies that conclude that the unbiased hypothesis tends to hold in times of crisis (Bai and Mollick, 2010). Fig.…”

“…In line with Hansen and Johansen (1999), Rangvid and Sørensen (2002) and Kutan and Zhou (2003), we use rolling cointegration tests to examine the time-varying relationship between the future spot return and the forward discount rather than OLS regressions as used in Bai and Mollick (2010). We find that there were different regimes after this reform and that the financial crisis has affected the relationship between the future spot return and the forward discount rate in China.…”

“…This outcome rejects the forward rate unbiasedness hypothesis (FRUH). 1 This hypothesis holds that the forward rate is an unbiased predictor of the future spot rate (Bai and Mollick, 2010). Landon and Smith (2003) argue that the rejection of the FRUH could occur because market behavior is inconsistent with rational expectations or because of a risk premium.…”

“…Several tests have been developed to determine breakpoints, like those of Zivot and Andrews (1992) and Perron (1998, 2003). Bai and Mollick (2010) investigate the effect of the Asian crisis of 1997 and the Turkish crisis of 2000 on the forward discount bias in fourteen emerging economies using endogenous multiple structural models. Bai and Mollick (2010) differentiate the crisis periods from the non-crisis periods by endogenous multiple structural breaks tests as suggested by Perron (1998, 2003) and conclude that the financial crisis has affected the forward discount bias.…”

Forward Rate Bias in Developed and Developing Countries: More Risky Not Less Rational

“…They find thatβ varies with the volatility regime. Bai and Mollick (2010) and Baillie and Cho (2014) employ Bai and Perron's (1998, 2003a, 2003b sequential test procedure, the former for a sample of developing countries and the latter for a sample of developed countries. They find that financial crisis triggers shifts inβ from negative to positive values.…”