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Testing the rationality of expectations in the Australian foreign exchange market using survey data with missing observations

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  • G. C. Lim
  • C. R. McKenzie

Abstract

This paper is concerned with testing the rationality of exchange rate expectations in the Australian foreign exchange market when there are missing observations in the survey data on expectations due to National or other holidays. The survey data analysed contains weekly observations on 1-week and 4-week ahead forecasts of the $US/$A and the Yen/$US exchange rates. The analysis proceeds by (i) examining the time series properties of the actual and expected exchange rates; (ii) investigating whether the cointegrating relationship between the actual and expected exchange rates suggested by the rational expectations hypothesis is satisfied; and (iii) for those cases where the appropriate cointegrating relationship is observed, testing for rationality using the forecast errors. In each of these steps, the problem of missing observations is addressed. Kalman filter techniques suggested by Harvey and Pierse (1984) are used to estimate the appropriate ARIMA models in each step. Results in steps (i) - (iii) are presented for two cases: when the problem of missing observations is ignored; and when appropriate techniques are used to deal with missing observations.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 8 (1998)
Issue (Month): 2 ()
Pages: 181-190

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Handle: RePEc:taf:apfiec:v:8:y:1998:i:2:p:181-190

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  1. Takatoshi Ito, 1988. "Foreign Exchange Rate Expectations: Micro Survey Data," NBER Working Papers 2679, National Bureau of Economic Research, Inc.
  2. Jeremy Smith & David W.R. Gruen, 1989. "A Random Walk Around the $A: Expectations, Risk, Interest Rates and Consequences for External Imbalance," RBA Research Discussion Papers rdp8906, Reserve Bank of Australia.
  3. Adrian Pagan, 1985. "Two Stage and Related Estimators and Their Applications," Cowles Foundation Discussion Papers 741, Cowles Foundation for Research in Economics, Yale University.
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  6. Peel, D. A., 1989. "On testing the properties of directly obtained expectations data," Economics Letters, Elsevier, vol. 30(2), pages 137-139, August.
  7. Jeffrey A. Frankel & Kenneth A. Froot, 1985. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc.
  8. Baillie,Richard T. & McMahon,Patrick C., 1990. "The Foreign Exchange Market," Cambridge Books, Cambridge University Press, number 9780521396905.
  9. Goodhart, Charles A E & McMahon, Patrick C & Ngama, Yerima Lawan, 1992. "Does the Forward Premium/Discount Help to Predict the Future Change in the Exchange Rate?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 39(2), pages 129-40, May.
  10. Granger, Clive W J, 1986. "Developments in the Study of Cointegrated Economic Variables," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 48(3), pages 213-28, August.
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  12. McKensie, C.R. & McAleer, M., 1990. "On Efficient Estimation and Correct Inference in Models with Generated Regressions: A General Approach," Papers 211, Australian National University - Department of Economics.
  13. Frankel, Jeff & Froot, Ken, 1986. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," Department of Economics, Working Paper Series qt1972q8wm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  14. Frankel, Jeffrey A & Chinn, Menzie D, 1993. "Exchange Rate Expectations and the Risk Premium: Tests for a Cross Section of 17 Currencies," Review of International Economics, Wiley Blackwell, vol. 1(2), pages 136-44, June.
  15. Barnhart, Scott W. & Szakmary, Andrew C., 1991. "Testing the Unbiased Forward Rate Hypothesis: Evidence on Unit Roots, Co-Integration, and Stochastic Coefficients," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(02), pages 245-267, June.
  16. Coleman, Mark, 1990. "Cointegration-based tests of daily foreign exchange market efficiency," Economics Letters, Elsevier, vol. 32(1), pages 53-59, January.
  17. Copeland, Laurence S, 1991. "Cointegration Tests with Daily Exchange Rate Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 53(2), pages 185-98, May.
  18. Shinji Takagi, 1991. "Exchange Rate Expectations: A Survey of Survey Studies," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 156-183, March.
  19. Chow, Gregory C & Lin, An-loh, 1971. "Best Linear Unbiased Interpolation, Distribution, and Extrapolation of Time Series by Related Series," The Review of Economics and Statistics, MIT Press, vol. 53(4), pages 372-75, November.
  20. Fischer, Andreas M, 1989. "Unit Roots and Survey Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 51(4), pages 451-63, November.
  21. Baillie, Richard T & Bollerslev, Tim, 1989. " Common Stochastic Trends in a System of Exchange Rates," Journal of Finance, American Finance Association, vol. 44(1), pages 167-81, March.
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Cited by:
  1. Chong, Lucy Lee-Yun & Puah, Chin-Hong & Md Isa, Abu Hassan, 2012. "Theory of rational expectations hypothesis: banks and other financial institutions in Malaysia," MPRA Paper 36657, University Library of Munich, Germany.
  2. Ron Jongen & Willem F.C. Verschoor & Christian C.P. Wolff, 2008. "Foreign Exchange Rate Expectations: Survey And Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 22(1), pages 140-165, 02.

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