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A microstructural analysis of the exchange rate expectation formation process

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  • Swarna Dutt

Abstract

In this letter we examine the consistency property of the exchange rate expectation formation process, a precondition to rational expectations and efficient markets. Two major survey data sets over multiple forecast horizons are examined using the recently available null of cointegration test. Experts expectations are consistent (inconsistent) over the short (long) forecast horizon. These results are supported by the current literature and upholds the theory of bandwagon effects in expectation formation. As an aside, this also indirectly supports the concept of long run convergence towards fundamentals determined equilibrium exchange rates, i.e., it supports Dornbusch's overshooting hypothesis.

Suggested Citation

  • Swarna Dutt, 1997. "A microstructural analysis of the exchange rate expectation formation process," Applied Economics Letters, Taylor & Francis Journals, vol. 4(9), pages 537-539.
    • Handle: RePEc:taf:apeclt:v:4:y:1997:i:9:p:537-539
    DOI: 10.1080/135048597354970
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    1. Froot, Kenneth A. & Ito, Takatoshi, 1989. "On the consistency of short-run and long-run exchange rate expectations," Journal of International Money and Finance, Elsevier, vol. 8(4), pages 487-510, December.
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    3. Phillips, P C B, 1991. "To Criticize the Critics: An Objective Bayesian Analysis of Stochastic Trends," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 6(4), pages 333-364, Oct.-Dec..
    4. Dutt, Swarna D., 1994. "The foreign exchange market efficiency hypothesis revisiting the puzzle," Economics Letters, Elsevier, vol. 45(4), pages 459-465, August.
    5. Liu, Peter C. & Maddala, G. S., 1992. "Rationality of survey data and tests for market efficiency in the foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 11(4), pages 366-381, August.
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