Currency crisis and the forward discount bias: Evidence from emerging economies under breaks |
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Authors: | Shuming Bai Andre Varella Mollick |
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Institution: | 1. Antai College of Economics and Management, Shanghai Jiao Tong University, China;2. School of Finance, Shanghai University of Finance and Economics, China |
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Abstract: | This paper investigates the effects of two financial crises (the 1997 Asian currency crisis and the 2000 Turkish financial crisis) on the forward discount bias in 14 emerging-market economies using a robust two-stage procedure. This unique sample of less researched currencies displays: (i) high persistence in forward discount equations; and (ii) varying variance ratios between changes in exchange rates and the forward premium. The findings provide new insights into the forward discount puzzle: financial crises exert considerable power on the forward discount bias and uphold the forward rate unbiasedness hypothesis (FRUH) by reverting the negative sign into positive. |
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