Empirical Evidence of the Spot and the Forward Exchange Rates in China Based on a GARCH-in-Mean Approach

In this article we examine the daily structure of the spot and forward exchange rates in China by means of a GARCH-M technique. Using the daily data from China foreign exchange market and the approaches of stationary test, GARCH and GARCH-In-Mean, the results show that the spot rate has a unit root while the forward exchange rate is 1(d) with d ,1, implying long memory and a time-varying premium exists in China's foreign exchange market. Therefore, this study provides a further evidence that the time-varying risk premium is a strong candidate in explaining the predictable excess return puzzle.