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Switching Between Expectation Processes in the Foreign Exchange Market: A Probabilistic Approach Using Survey Data

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Author Info

  • Georges Prat

    (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre)

  • Remzi Uctum

    (EconomiX - CNRS : UMR7166 - Université de Paris X - Nanterre)

Abstract

This paper relaxes a fundamental hypothesis commonly accepted in the expectation formation literature: expectations are, unchangingly, either rational or generated by one of the three simple extrapolative, regressive or adaptive processes. Using expectations survey data provided by Consensus Forecasts on six European exchange rates against the US Dollar, we find that the rational expectations hypothesis is rejected at the aggregate level. By implementing a switching regression methodology with stochastic choice of regime, we show that the expectation generating process is given at any time by some combination of the three simple processes. An interpretation of this framework in terms of economically rational expectations is suggested.

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Bibliographic Info

Paper provided by HAL in its series Post-Print with number halshs-00081586.

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Date of creation: Sep 2007
Date of revision:
Publication status: Published, Review of International Economics, 2007, 15, 4, 700-719
Handle: RePEc:hal:journl:halshs-00081586

Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00081586/en/
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Related research

Keywords: expectation formation; switching-regime; exchange rates; survey data; cost and advantage analysis;

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Cited by:
  1. Jongen, Ron & Verschoor, Willem F.C. & Wolff, Christian C.P. & Zwinkels, Remco C.J., 2012. "Explaining dispersion in foreign exchange expectations: A heterogeneous agent approach," Journal of Economic Dynamics and Control, Elsevier, vol. 36(5), pages 719-735.
  2. ter Ellen, Saskia & Verschoor, Willem F.C. & Zwinkels, Remco C.J., 2013. "Dynamic expectation formation in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 75-97.
  3. Remzi Uctum, 2007. "Econométrie des modèles à changements de régimes: un essai de synthèse," Post-Print halshs-00174034, HAL.
  4. Prat, Georges & Uctum, Remzi, 2011. "Modelling oil price expectations: Evidence from survey data," The Quarterly Review of Economics and Finance, Elsevier, vol. 51(3), pages 236-247, June.
  5. Georges Prat & Remzi Uctum, 2012. "Modeling the horizon-dependent risk premium in the forex market: evidence from survey data," EconomiX Working Papers 2012-29, University of Paris West - Nanterre la Défense, EconomiX.

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