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

Shuming Bai and Andre Mollick ()

Journal of International Financial Markets, Institutions and Money, 2010, vol. 20, issue 5, 556-574

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.

Keywords: Currency; crisis; Forward; discount; bias; Emerging; economies; Multiple; structural; breaks (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:20:y:2010:i:5:p:556-574

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