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Short-Run and Long-Run Expectationss of the Yen/Dollar Exchange Rate

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Author Info

  • Ito, T.

Abstract

The survey data on the yen/dollar exchange rate, collected twice a month for eight years from 1985 to 1993, shows the following features. First, the expected exchange rate changes in the short horizon (one month) are of the band-wagon type while the expected changes in the long horizon (three to six months) are of the mean- reversion type. That is, foreign exchange traders infer from recent appreciations or depreciation that the recent change in the exchange rate will continue for a while, but the direction of changes will reverse, eventually. Second, this result is robust for the entire sample period, which includes sub-periods of sharp yen appreciations and of relative calm, and with respect to different specifications. Third, the deviation from an equilibrium exchange rate does not yield a robust estimate in the regression of expectation formation. Although the history of the yen/dollar exchange rate fluctuations in the past two decades shows mean reversion over several years, they are not captured in the six-month expectations in the survey data.

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Bibliographic Info

Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1661.

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Length: 25 pages
Date of creation: 1993
Date of revision:
Handle: RePEc:fth:harver:1661

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Keywords: expectations ; exchange rate;

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References

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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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Cited by:
  1. Pippenger, John, 2004. "In search of overshooting and bandwagons in exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(1), pages 87-98, February.
  2. Jongen, Ron & Verschoor, Willem F.C. & Wolff, Christian C.P., 2008. "Foreign exchange rate expectations: survey and synthesis," Open Access publications from Maastricht University urn:nbn:nl:ui:27-13932, Maastricht University.
  3. Jeffrey A. Frankel, 1996. "How Well do Foreign Exchange Markets Function: Might a Tobin Tax Help?," NBER Working Papers 5422, National Bureau of Economic Research, Inc.
  4. Charles Engel, 1996. "The Forward Discount Anomaly and the Risk Premium: A Survey of Recent Evidence," NBER Working Papers 5312, National Bureau of Economic Research, Inc.
  5. Lukas Menkhoff & Rafael Rebitzky & Michael Schroder, 2008. "Do dollar forecasters believe too much in PPP?," Applied Economics, Taylor and Francis Journals, vol. 40(3), pages 261-270.
  6. Rotheli, Tobias F., 2002. "Bandwagon effects and run patterns in exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 12(2), pages 157-166, April.
  7. Carl Bonham & Richard Cohen & Shigeyuki Abe, 2006. "The Rationality and Heterogeneity of Survey Forecasts of the Yen-Dollar Exchange Rate: A Reexamination," Working Papers 200611, University of Hawaii at Manoa, Department of Economics.

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