Yen/Dollar volatility and Chinese fear of floating: Pressures from the NDF market

Information Flow Between Forward and Spot Markets: Evidence From the Chinese Renminbi

“…The informational content of the 1‐month forward rate remains whether it is used in the traditional simple univariate regression or used in the more complex vector error correction model. While our evidence is generally consistent with Gu and McNelis (), which as a notable exception to the literature also presents evidence for the RMB spot rate out‐of‐sample predictability, the model specifications under consideration are generally different from theirs (because the main interest of this paper is also different from theirs)…”

“…Specifically, the shocks to 6‐month and 12‐month (1‐month and 3‐month) forecast error variance decomposition together can on average explain at least 20% (about 43%) of the spot rate variation at the short horizon of 1‐week and about 35–40% (about 44%) at the longer horizons of half a year to a year. Thus, the findings provide stronger evidence for the informational role of the RMB forward rates, as reported in the earlier literature (e.g., Ding et al, ; Gu and McNelis, ). Furthermore, extending Ding et al (), the rolling forecast error variance decomposition shows that the information flow from forward rates of different maturities to the spot rate is dramatically different over time.…”

“…Second, extending previous studies which only focus on only one RMB NDF contract with a short maturity (i.e., 1‐month or 3‐month maturity) (e.g., Ding et al, ; Gu and McNelis, ; Zhao et al, ), we exploit the term structure of RMB NDF forward rates up to 12‐month maturity and document the importance of additional information from longer maturity (i.e., 6‐month and 12‐month) forward rates in driving the spot rate movement. Specifically, the shocks to 6‐month and 12‐month (1‐month and 3‐month) forecast error variance decomposition together can on average explain at least 20% (about 43%) of the spot rate variation at the short horizon of 1‐week and about 35–40% (about 44%) at the longer horizons of half a year to a year.…”

The Price Discovery Puzzle in Offshore Yuan Trading: Different Contributions for Different Contracts

“…Beyond its impact on the onshore spot market, Gu and McNelis () find that the NDF links movements in the euro to Chinese markets through offshore speculative pressures, whereas no such effect is seen between the Korean won NDF and onshore won spot markets. Gu and McNelis note that the difference in NDF transmission between the Chinese and Korean markets is due to the relatively more restrictive Chinese capital controls.…”

“…In terms of information transmission, Gu and McNelis () find a unidirectional relationship from Korean won to Korean forward rates. Misra and Behera () find that onshore and offshore Indian rupee rates transmit bidirectionality whereas Guru () finds that, while initially bidirectional, offshore rupee forwards dominated transmission after the September 2008 introduction of rupee futures.…”