Can Offshore Markets Beat Random Walk An Evaluation Of The Out Of Sample Rmb Exchange Rate Predictability
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Can Offshore Markets Beat Random Walk? An Evaluation of the Out-of-Sample RMB Exchange Rate Predictability
Author | : Sichong Chen |
Publisher | : |
Total Pages | : 20 |
Release | : 2016 |
Genre | : |
ISBN | : |
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This study evaluates the in-sample and out-of-sample RMB exchange rate forecasting with a predictor of CNH-CNY pricing differential. Despite significant evidence of in-sample fit of conditional models at short horizons, we find that RMB exchange rate forecasts based on CNH-CNY spreads do not work well out-of-sample. While the poor performance in predicting CNH is mainly driven by the PBC announcement on improving quotation of the central parity of RMB in Aug. 11, 2015, the out-of-sample performance of CNY predictions was consistently worse than its unconditional counterpart before 2015. However, we show that predictive regressions using CNH-CNY spreads can beat random walk even in the CNY market, as long as we remove trend from the CNH-CNY spread. Finally, we discuss policy implications of our forecasting results for pricing power and capital restrictions.
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