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

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.