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Asymmetric loss and rationality of Chinese renminbi forecasts: An implication for the trade between China and the US

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  • Tsuchiya, Yoichi

Abstract

This study examines the asymmetry of the loss function in Chinese renminbi exchange rate forecasts and tests the rationality of the forecasts, assuming a possibly asymmetric loss function. The results indicate that the majority of forecasters have asymmetric loss adverse to US dollar appreciation and the direction of asymmetry is associated with institutional bases, in particular, those in the US. It is consistent with the facts that RMB is often said to be undervalued and there are political conflicts between China and its largest trade partner, the US. This study also finds evidence of rationality under an asymmetric loss function. It implies that those forecasters efficiently use the information in key exchange rate indicators.

Suggested Citation

  • Tsuchiya, Yoichi, 2016. "Asymmetric loss and rationality of Chinese renminbi forecasts: An implication for the trade between China and the US," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 44(C), pages 116-127.
    • Handle: RePEc:eee:intfin:v:44:y:2016:i:c:p:116-127
    DOI: 10.1016/j.intfin.2016.05.001
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    2. Batten, Jonathan A. & Szilagyi, Peter G., 2016. "The internationalisation of the RMB: New starts, jumps and tipping points," Emerging Markets Review, Elsevier, vol. 28(C), pages 221-238.

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    More about this item

    Keywords

    Rationality; Exchange rate; Forecast evaluation; Emerging markets; Managed float; Peso problem;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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