An Empirical Evidence of Chinese RMB Spot and Forward Exchange Rate Based on a GARCH-in-mean Approach

In a no-arbitrage environment, the both assumptions of risk neutrality and rational expectations imply that the forward foreign exchange rate should be an unbiased predictor of the corresponding spot rate. This paper focused on Chinese foreign exchange market and examined whether RMB-USD forward exchange rate is unbiased estimate of the spot rate and tried to look for the reasons of the biased estimation by means of using a GARCH-in-mean approach. The results showed that the spot rate has a unit root while the forward exchange rate is 1(d) with d, 1, implying long memory and forward exchange rate of RMB-USD is not unbiased estimate of the future spot exchange rate. Moreover, we found that a time-varying premium existing maybe was one reason of the biased estimation in China´s foreign exchange market.