This study was sponsored by the National Social Science Fund (11BJ022), the Guangdong Province Philosophy Social Science Planning Project (GD10CYJ02) and the Guangdong High Level Talent Support Program (2011). This article benefited from discussions at the second Sun Yat-sen University Finance Forum for National PhD Candidates. Thanks go to Jian Yang, Wenli Zou, Jianhao Lin, Haisheng Yang, Xiaodong Lu and Wei Wang for valuable suggestions.
Empirical Study on Information Asymmetry Based on Chinese Forward Exchange Rate Market
Article first published online: 1 AUG 2012
© 2012 The Authors China & World Economy © 2012 Institute of World Economics and Politics, Chinese Academy of Social Sciences
China & World Economy
Volume 20, Issue 4, pages 74–91, July-August 2012
How to Cite
Wang, X. and Yang, J. (2012), Empirical Study on Information Asymmetry Based on Chinese Forward Exchange Rate Market. China & World Economy, 20: 74–91. doi: 10.1111/j.1749-124X.2012.01296.x
- Issue published online: 1 AUG 2012
- Article first published online: 1 AUG 2012
- domestic forward market;
- forward exchange rate;
- information asymmetry;
- non-deliverable forward market;
- term structure
Many published studies have considered information asymmetry between domestic and foreign investors about local assets in the stock market, particularly in developed markets. The present study proposes a new perspective to address the issue in the case of China's forward exchange rate market. Following the framework of Clarida and Taylor (1997), the term structures of exchange rates in the domestic forward and the non-deliverable forward markets are constructed and then applied to predict future spot exchange rates based on a vector equilibrium correction model. By comparing the forecast accuracy on the basis of the root mean square error and the mean absolute error, it is shown that dynamic out-of-sample forecasts of the domestic forward market are superior to those of the non-deliverable forward market, suggesting that domestic investors are better informed than foreign investors. The result has several important policy implications, especially for exchange rate determination.