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

  • Bai, Shuming
  • Mollick, Andre Varella

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/intfin

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