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

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  • Bai, Shuming
  • Mollick, Andre Varella

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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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

Volume (Year): 20 (2010)
Issue (Month): 5 (December)
Pages: 556-574

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Handle: RePEc:eee:intfin:v:20:y:2010:i:5:p:556-574

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Web page: http://www.elsevier.com/locate/intfin

Related research

Keywords: Currency crisis Forward discount bias Emerging economies Multiple structural breaks;

References

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Cited by:
  1. Kumar, Satish & Trück, Stefan, 2014. "Unbiasedness and risk premiums in the Indian currency futures market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 13-32.
  2. André Mollick & Tibebe Assefa, 2013. "Carry-trades on the yen and the Swiss franc: are they different?," Journal of Economics and Finance, Springer, vol. 37(3), pages 402-423, July.

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