Switching Between Expectation Processes in the Foreign Exchange Market: A Probabilistic Approach Using Survey Data
AbstractThis 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 InfoPaper provided by HAL in its series Post-Print with number halshs-00081586.
Date of creation: Sep 2007
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Publication status: Published, Review of International Economics, 2007, 15, 4, 700-719
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expectation formation; switching-regime; exchange rates; survey data; cost and advantage analysis;
Other versions of this item:
- Georges Prat & Remzi Uctum, 2007. "Switching between Expectation Processes in the Foreign Exchange Market: a Probabilistic Approach using Survey Data," Review of International Economics, Wiley Blackwell, vol. 15(4), pages 700-719, 09.
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