Switching between Expectation Processes in the Foreign Exchange Market: a Probabilistic Approach using Survey Data
AbstractThis paper relaxes a fundamental hypothesis commonly accepted in the expectation formation literature: expectations are, unchangingly, either rational or generated by one of the three simple extrapolative, regressive, or adaptive processes. Using expectations survey data provided by Consensus Forecasts on six European exchange rates against the US dollar, we find that the rational expectations hypothesis is rejected at the aggregate level. By implementing a switching-regression methodology with stochastic choice of regime, we show that the expectation generating process is given at any time by some combination of the three simple processes. An interpretation of this framework in terms of economically rational expectations is suggested. Copyright � 2007 The Authors; Journal compilation � 2007 Blackwell Publishing Ltd.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Review of International Economics.
Volume (Year): 15 (2007)
Issue (Month): 4 (09)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0965-7576
Other versions of this item:
- Georges Prat & Remzi Uctum, 2007. "Switching Between Expectation Processes in the Foreign Exchange Market: A Probabilistic Approach Using Survey Data," Post-Print halshs-00081586, HAL.
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- Uctum, Remzi, 2007.
"Économétrie des modèles à changement de régimes : un essai de synthèse,"
Société Canadienne de Science Economique, vol. 83(4), pages 447-482, dÃ©cembre.
- Remzi Uctum, 2007. "Econométrie des modèles à changements de régimes: un essai de synthèse," Post-Print halshs-00174034, HAL.
- Georges Prat & Remzi Uctum, 2009.
"Modelling oil price expectations: evidence from survey data,"
EconomiX Working Papers
2009-28, University of Paris West - Nanterre la Défense, EconomiX.
- Prat, Georges & Uctum, Remzi, 2011. "Modelling oil price expectations: Evidence from survey data," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(3), pages 236-247, June.
- Georges Prat & Remzi Uctum, 2012. "Modeling the horizon-dependent risk premium in the forex market: evidence from survey data," EconomiX Working Papers 2012-29, University of Paris West - Nanterre la Défense, EconomiX.
- Jongen, Ron & Verschoor, Willem F.C. & Wolff, Christian C.P. & Zwinkels, Remco C.J., 2012. "Explaining dispersion in foreign exchange expectations: A heterogeneous agent approach," Journal of Economic Dynamics and Control, Elsevier, vol. 36(5), pages 719-735.
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