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Dynamic expectation formation in the foreign exchange market

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Author Info

  • ter Ellen, Saskia
  • Verschoor, Willem F.C.
  • Zwinkels, Remco C.J.

Abstract

This paper investigates the time-varying nature of expectation formation rules for institutional investors in the foreign exchange market. Using a dataset of survey expectations for four exchange rates, we first distinguish three different general rules. We find a momentum rule, a fundamental rule, and a rule that takes advantage of interest differentials between countries. Apart from heterogeneity in expectation formation rules, we show that the rules are time-varying conditional on a number of different factors, such as the sign of the most recent return, the forecast horizon, the distance to the PPP rate, and the extent to which the rule produces forecast errors vis-à-vis the market exchange rate.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 37 (2013)
Issue (Month): C ()
Pages: 75-97

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Handle: RePEc:eee:jimfin:v:37:y:2013:i:c:p:75-97

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: Expectation formation; Foreign exchange; Heterogeneity; Market anomalies; Survey data;

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References

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Cited by:
  1. Georges Prat & Remzi Uctum, 2014. "Expectation formation in the foreign exchange market: a time-varying heterogeneity approach using survey data," Working Papers 2014-235, Department of Research, Ipag Business School.

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