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Are foreign exchange forecasts rational? New evidence from survey data

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Author Info
Kathryn M. Dominguez

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Abstract

Tests of rational expectations in foreign exchange markets have been inconclusive because of disagreement over the underlying asset pricing model. This paper uses a newly available set of data on foreign exchange forecasts to examine directly expectations formation in four foreign currency markets. Generally, results do not support the simple rational expectations hypothesis.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 281.

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Date of creation: 1986
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Handle: RePEc:fip:fedgif:281

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Related research
Keywords: Foreign exchange rates ; Rational expectations (Economic theory) ; Forecasting;

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References listed on IDEAS
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.:
  1. Hakkio, Craig S, 1981. "Expectations and the Forward Exchange Rate," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(3), pages 663-78, October. [Downloadable!] (restricted)
    Other versions:
  2. Lars Peter Hansen & Robert J. Hodrick, 1983. "Risk Averse Speculation in the Forward Foreign Exchange Market: An Econometric Analysis of Linear Models," NBER Chapters, in: Exchange Rates and International Macroeconomics, pages 113-152 National Bureau of Economic Research, Inc. [Downloadable!]
  3. Struth, Friedrich K, 1984. "Modelling Expectations Formation with Parameter-Adaptive Filters: An Empirical Application to the Livingston Forecasts," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 46(3), pages 211-39, August.
  4. Hali J. Edison, 1983. "The rise and fall of sterling: testing alternative models of exchange rate determination," International Finance Discussion Papers 224, Board of Governors of the Federal Reserve System (U.S.).
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  5. Akerlof, George A & Yellen, Janet L, 1985. "Can Small Deviations from Rationality Make Significant Differences to Economic Equilibria?," American Economic Review, American Economic Association, vol. 75(4), pages 708-20, September. [Downloadable!] (restricted)
  6. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May. [Downloadable!] (restricted)
  7. Hodrick, Robert J. & Srivastava, Sanjay, 1984. "An investigation of risk and return in forward foreign exchange," Journal of International Money and Finance, Elsevier, vol. 3(1), pages 5-29, April. [Downloadable!] (restricted)
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  8. Frenkel, Jacob A, 1976. " A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence," Scandinavian Journal of Economics, Blackwell Publishing, vol. 78(2), pages 200-224.
  9. Dominguez, Kathryn M., 1986. "Are foreign exchange forecasts rational? : New evidence from survey data," Economics Letters, Elsevier, vol. 21(3), pages 277-281. [Downloadable!] (restricted)
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  10. Domowitz, Ian & Hakkio, Craig S., 1985. "Conditional variance and the risk premium in the foreign exchange market," Journal of International Economics, Elsevier, vol. 19(1-2), pages 47-66, August. [Downloadable!] (restricted)
  11. Rudiger Dornbusch, 1983. "Flexible Exchange Rates and Interdependence," NBER Working Papers 1035, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  12. John A. Carlson, 1977. "A Study of Price Forecasts," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 6, number 1, pages 33-63 National Bureau of Economic Research, Inc. [Downloadable!]
  13. Hooper, Peter & Morton, John, 1982. "Fluctuations in the dollar: A model of nominal and real exchange rate determination," Journal of International Money and Finance, Elsevier, vol. 1(1), pages 39-56, January. [Downloadable!] (restricted)
  14. Hayashi, Fumio & Sims, Christopher A, 1983. "Nearly Efficient Estimation of Time Series Models with Predetermined, but Not Exogenous, Instruments," Econometrica, Econometric Society, vol. 51(3), pages 783-98, May. [Downloadable!] (restricted)
  15. Branson, William H. & Halttunen, Hannu & Masson, Paul, 1977. "Exchange rates in the short run: The dollar-dentschemark rate," European Economic Review, Elsevier, vol. 10(3), pages 303-324. [Downloadable!] (restricted)
  16. Sargan, John Denis & Bhargava, Alok, 1983. "Testing Residuals from Least Squares Regression for Being Generated by the Gaussian Random Walk," Econometrica, Econometric Society, vol. 51(1), pages 153-74, January. [Downloadable!] (restricted)
  17. Meese, Richard A & Singleton, Kenneth J, 1982. " On Unit Roots and the Empirical Modeling of Exchange Rates," Journal of Finance, American Finance Association, vol. 37(4), pages 1029-35, September. [Downloadable!] (restricted)
  18. Haltiwanger, John & Waldman, Michael, 1985. "Rational Expectations and the Limits of Rationality: An Analysis of Heterogeneity," American Economic Review, American Economic Association, vol. 75(3), pages 326-40, June. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Menzie Chinn & Jeffery Frankel, 1995. "More survey data on exchange rate expectations: More currencies, more horizons, more tests," International Finance 9508003, EconWPA. [Downloadable!]
  2. William P. Osterberg, 2000. "New results on the rationality of survey measures of exchange-rate expectations," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 14-21. [Downloadable!]
  3. Kathryn M. Dominguez, 1986. "Are foreign exchange forecasts rational? New evidence from survey data," International Finance Discussion Papers 281, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  4. Yin-Wong Cheung & Menzie D. Chinn, 1999. "Are Macroeconomic Forecasts Informative? Cointegration Evidence from the ASA-NBER Surveys," NBER Working Papers 6926, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Kenneth A. Froot & Takatoshi Ito, 1990. "On the Consistency of Short-run and Long-run Exchange Rate Expectations," NBER Working Papers 2577, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Jeffrey Frankel & Menzie Chinn, 1991. "Exchange Rate Expectations and the Risk Premium: Tests For a Cross- Section of 17 Currencies," NBER Working Papers 3806, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Pesaran, M.H. & Weale, M., 2005. "Survey Expectations," Cambridge Working Papers in Economics 0536, Faculty of Economics, University of Cambridge. [Downloadable!]
    Other versions:
  8. 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. [Downloadable!] (restricted)
    Other versions:
  9. Kathryn M. Dominguez & Jeffrey Frankel, 1994. "Does Foreign Exchange Intervention Matter? Disentangling the Portfolio and Expectations Effects for the Mark," NBER Working Papers 3299, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  10. Ronald MacDonald & Lukas Menkhoff & Rafael R. Rebitzky, 2009. "Exchange rate forecasters’ performance: evidence of skill?," Working Papers 2009_13, Department of Economics, University of Glasgow. [Downloadable!]
    Other versions:
  11. Boum-Jong Choe, 1990. "Rational expectations and commodity price forecasts," Policy Research Working Paper Series 435, The World Bank. [Downloadable!]
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