Forecasting the CNY-CNH pricing differential: The role of investor attention

As the exponential expansion in the international use of RMB, the issues concerning “one currency, two markets” have attracted increasing attentions from both policymakers and academics. We investigate the forecast power of investor attention for the CNY-CNH pricing differential. Investor attention displays statistically and economically significant in-sample and out-of-sample predictability of the CNY-CNH pricing gap at both weekly and monthly frequencies. Also, investor attention provides more useful information than macro variables for detecting the typical rise (decline) behavior near a CNY-CNH differential peak (trough). In addition, investor attention generates substantial economic values in asset allocation exercise. Moreover, we demonstrate that investor attention provides statistically and economically significant out-of-sample forecast for the CNY and CNH carry trade.