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

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  • 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. Kenneth A. Froot & Takatoshi Ito, 1988. "On the Consistency of Short-run and Long-run Exchange Rate Expectations," NBER Working Papers 2577, National Bureau of Economic Research, Inc.
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Cited by:
  1. Georges Prat & Remzi Uctum, 2014. "Expectation formation in the foreign exchange market: a time-varying heterogeneity approach using survey data," EconomiX Working Papers 2014-17, University of Paris West - Nanterre la Défense, EconomiX.
  2. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
  3. 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.
  4. 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.
  5. 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.
  6. Lukas Menkhoff & Rafael Rebitzky & Michael Schroder, 2008. "Do dollar forecasters believe too much in PPP?," Applied Economics, Taylor & Francis Journals, vol. 40(3), pages 261-270.
  7. 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.
  8. 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.
  9. MacDonald, Ronald & Nagayasu, Jun, 2013. "Currency Forecast Errors at Times of Low Interest Rates: Evidence from Survey Data on the Yen/Dollar Exchange Rate," SIRE Discussion Papers 2013-100, Scottish Institute for Research in Economics (SIRE).

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