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Short-term and long-term expectations of the yen/dollar exchange rate: Evidence from survey data

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  • Frankel, Jeffrey A.
  • Froot, Kenneth A.

Abstract

Three surveys of exchange rate expectations allow us to measure directly the expected rates of return on yen versus dollars. Expectations of yen appreciation against the dollar have been (1) consistently large, (2) variable, and (3) greater than the forward premium, implying that investors were willing to accept a lower expected return on dollar assets. At short-term horizons expectations exhibit bandwagon effects, while at longer-term horizons they show the reverse. A 10 percent yen appreciation generates the expectation of a further appreciation of 2.4 percent over the following week, for example, but a depreciation of 3.4 percent over the following year. At any horizon, investors would do better to reduce the absolute magnitude of expected depreciation. The true spot rate process behaves more like a random walk.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of the Japanese and International Economies.

Volume (Year): 1 (1987)
Issue (Month): 3 (September)
Pages: 249-274

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Handle: RePEc:eee:jjieco:v:1:y:1987:i:3:p:249-274

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Web page: http://www.elsevier.com/locate/inca/622903

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  1. Hodrick, Robert J. & Srivastava, Sanjay, 1984. "An investigation of risk and return in forward foreign exchange," Journal of International Money and Finance, Elsevier, Elsevier, vol. 3(1), pages 5-29, April.
  2. Frankel, Jeffrey A., 1982. "In search of the exchange risk premium: A six-currency test assuming mean-variance optimization," Journal of International Money and Finance, Elsevier, Elsevier, vol. 1(1), pages 255-274, January.
  3. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, Elsevier, vol. 14(3), pages 319-338, November.
  4. Richard C. Marston, 1986. "Real Exchange Rates and Productivity Growth in the United States and Japan," NBER Working Papers 1922, National Bureau of Economic Research, Inc.
  5. Takatoshi Ito, 1984. "Use of (Time-Domain) Vector Autoregressions to Test Uncovered Interest Parity," NBER Working Papers 1493, National Bureau of Economic Research, Inc.
  6. Paul Krugman, 1986. "Is the Japan Problem Over?," NBER Working Papers 1962, National Bureau of Economic Research, Inc.
  7. John F. O. Bilson, 1981. "Profitability and Stability in International Currency Markets," NBER Working Papers 0664, National Bureau of Economic Research, Inc.
  8. Manuel H. Johnson & Bonnie E. Loopesko, 1986. "The yen-dollar relationship: a recent historical perspective," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 288, Board of Governors of the Federal Reserve System (U.S.).
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