What Drives Heterogeneity in Foreign Exchange Rate Expectations: Deep Insights from a New Survey
AbstractForeign exchange rate expectations play a central role in virtually all monetary models for the open economy. Therefore, it is extremely important to gain empirical insights into the expectations formation process. In this paper, we use a unique disaggregated data set to model the expectations of the Yen/USD exchange rate of about 50 leading foreign exchange rate professionals. The survey includes not only forecasts of the exchange rate, but also for macroeconomic fundamentals, like GDP growth, inflation, and interest rates. Different expectations of fundamentals might lead to different views of exchange rate dynamics. Using panel models, we are able to confirm the heterogeneity of exchange rate expectations often detected by former authors. More important, we provide strong evidence regarding the likely source of heterogeneity. In line with forward looking models for the exchange rate, expected fundamentals have a substantial impact on exchange rate expectations, thereby challenging the backward looking evidence of previous studies. However, the heterogeneity in the expectations of macroeconomic fundamentals is not sufficient to explain the heterogeneity in exchange rate expectations.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 624.
Length: 14 p.
Date of creation: 2006
Date of revision:
Publication status: Published in: International Journal of Finance and Economics 13 (2008), Iss. 4, 360-367
Exchange rate expectations; heterogeneity of expectations; expected fundamentals;
Find related papers by JEL classification:
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-30 (All new papers)
- NEP-CBA-2006-09-30 (Central Banking)
- NEP-FMK-2006-09-30 (Financial Markets)
- NEP-FOR-2006-09-30 (Forecasting)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cho, Dong W. & Hersch, Philip L., 1998. "Forecaster Characteristics and Forecast Outcomes," Journal of Economics and Business, Elsevier, vol. 50(1), pages 39-48, January.
- Shinji Takagi, 1991. "Exchange Rate Expectations: A Survey of Survey Studies," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 156-183, March.
- Greer, Mark, 2003. "Directional accuracy tests of long-term interest rate forecasts," International Journal of Forecasting, Elsevier, vol. 19(2), pages 291-298.
- Kolb, R. A. & Stekler, H. O., 1996. "Is there a consensus among financial forecasters?," International Journal of Forecasting, Elsevier, vol. 12(4), pages 455-464, December.
- Ito, Takatoshi, 1990.
"Foreign Exchange Rate Expectations: Micro Survey Data,"
American Economic Review,
American Economic Association, vol. 80(3), pages 434-49, June.
- Takatoshi Ito, 1990. "Foreign Exchange Rate Expectations: Micro Survey Data," NBER Working Papers 2679, National Bureau of Economic Research, Inc.
- Cavaglia, Stefano & Verschoor, Willem F. C. & Wolff, Christian C. P., 1993.
"Further evidence on exchange rate expectations,"
Journal of International Money and Finance,
Elsevier, vol. 12(1), pages 78-98, February.
- Cavaglia, Stefano & Verschoor, Willem F.C. & Wolff, Christian C.P., 1993. "Further evidence on exchange rate expectations," Open Access publications from Maastricht University urn:nbn:nl:ui:27-13903, Maastricht University.
- Ehrmann, Michael & Fratzscher, Marcel, 2004.
"Exchange rates and fundamentals: new evidence from real-time data,"
Working Paper Series
0365, European Central Bank.
- Ehrmann, Michael & Fratzscher, Marcel, 2005. "Exchange rates and fundamentals: new evidence from real-time data," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 317-341, March.
- MacDonald, Ronald & Torrance, T S, 1988. "On Risk, Rationality and Excessive Speculation in the Deutschmark-U.S. Dollar Exchange Market: Some Evidence Using Survey Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 50(2), pages 107-23, May.
- Benassy-Quere, Agnes & Larribeau, Sophie & MacDonald, Ronald, 2003. "Models of exchange rate expectations: how much heterogeneity?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 13(2), pages 113-136, April.
- Cheung, Yin-Wong & Wong, Clement Yuk-Pang, 2000. "A survey of market practitioners' views on exchange rate dynamics," Journal of International Economics, Elsevier, vol. 51(2), pages 401-419, August.
- Rich Lyons & Martin Evans, 2004.
"A New Micro Model of Exchange Rate Dynamics,"
Econometric Society 2004 North American Winter Meetings
622, Econometric Society.
- Frankel, Jeffrey A & Froot, Kenneth A, 1987.
"Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations,"
American Economic Review,
American Economic Association, vol. 77(1), pages 133-53, March.
- 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.
- Jeffrey Frankel and Kenneth Froot., 1991.
"Exchange Rate Forecasting Techniques, Survey Data, and Implications for the Foreign Exchange Market,"
Economics Working Papers
91-158, University of California at Berkeley.
- Jeffrey A. Frankel & Kenneth Froot, 1990. "Exchange Rate Forecasting Techniques, Survey Data, and Implications for the Foreign Exchange Market," NBER Working Papers 3470, National Bureau of Economic Research, Inc.
- Mussa, Michael, 1982. "A Model of Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 74-104, February.
- Allen, Helen & Taylor, Mark P, 1990. "Charts, Noise and Fundamentals in the London Foreign Exchange Market," Economic Journal, Royal Economic Society, vol. 100(400), pages 49-59, Supplemen.
- Mark, Nelson C, 1995. "Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability," American Economic Review, American Economic Association, vol. 85(1), pages 201-18, March.
- Robert Eisenbeis & Daniel Waggoner & Tao Zha, 2002. "Evaluating Wall Street Journal survey forecasters: a multivariate approach," Working Paper 2002-8, Federal Reserve Bank of Atlanta.
- Jeffrey A. Frankel & Kenneth A. Froot, 1987. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc.
- Macdonald, Ronald & Marsh, Ian W., 1996. "Currency forecasters are heterogeneous: confirmation and consequences," Journal of International Money and Finance, Elsevier, vol. 15(5), pages 665-685, October.
- Dick, Christian D. & MacDonald, Ronald & Menkhoff, Lukas, 2011. "Individual exchange rate forecasts and expected fundamentals," ZEW Discussion Papers 11-062, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
- Christian Pierdzioch & Jan-Christoph Rülke & Georg Stadtmann, 2012.
"A Note on Forecasting Emerging Market Exchange Rates: Evidence of Anti-herding,"
Review of International Economics,
Wiley Blackwell, vol. 20(5), pages 974-984, November.
- Pierdzioch, Christian & Rülke, Jan-Christoph & Stadtmann, Georg, 2012. "A note on forecasting emerging market exchange rates: Evidence of anti-herding," Discussion Papers 324, European University Viadrina Frankfurt (Oder), Department of Business Administration and Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bibliothek).
If references are entirely missing, you can add them using this form.