Can Offshore Markets Beat Random Walk? An Evaluation of the Out-of-Sample RMB Exchange Rate Predictability

Download or read book Can Offshore Markets Beat Random Walk? An Evaluation of the Out-of-Sample RMB Exchange Rate Predictability written by Sichong Chen and published by . This book was released on 2016 with total page 20 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.