Advanced Search
MyIDEAS: Login to save this paper or follow this series

Home Bias in Currency Forecasts

Contents:

Author Info

  • Yu-chin Chen
  • Kwok Ping Tsang
  • Wen Jen Tsay

Abstract

The "home bias" phenomenon states that empirically, economic agents often under- utilize opportunities beyond their country borders, and it is well-documented in various international pricing and purchase patterns. This bias manifests in the forms of fewer exchanges of goods and net equity-holdings, as well as less arbitrage of price differences across borders than theoretically predicted to be optimal. Our paper documents another form of home bias, where market participants appear to under-weigh information beyond their borders when making currency forecasts. Using monthly data from 1995 to 2010 for seven major exchange rates relative to the US dollar, we show that excess currency returns and the errors in investors' consensus forecasts not only depend on the interest differentials between the pair of countries, but they depend more strongly on interest rates in a broader set of countries. A global short interest differential and a global long interest differential are driving the results.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: ftp://repec.econ.vt.edu/Papers/Salehi-Isfahani/ReturnsEducation.pdf
File Function: First version, 2010
Download Restriction: no

Bibliographic Info

Paper provided by Virginia Polytechnic Institute and State University, Department of Economics in its series Working Papers with number e07-18.

as in new window
Length: 37 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:vpi:wpaper:e07-18

Contact details of provider:
Postal: 3016 Pamplin Hall, Blacksburg, VA 24061-0316
Phone: 540-231-9636
Fax: 540-231-5097
Web page: http://www.econ.vt.edu
More information through EDIRC

Related research

Keywords: Survey Data; Excess Currency Returns; Global Shock;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Yu-chin Chen & Kwok Ping Tsang, 2010. "What Does the Yield Curve Tell Us about Exchange Rate Predictability?," Working Papers, Hong Kong Institute for Monetary Research 292010, Hong Kong Institute for Monetary Research.
  2. Kajal Lahiri & Gultekin Isiklar & Prakash Loungani, 2006. "How quickly do forecasters incorporate news? Evidence from cross-country surveys," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 21(6), pages 703-725.
  3. Mark W. Watson & James H. Stock, 2004. "Combination forecasts of output growth in a seven-country data set," Journal of Forecasting, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 23(6), pages 405-430.
  4. Froot, Kenneth A. & Frankel, Jeffrey A., 1988. "Forward Discount Bias: Is It an Exchange Risk Premium?," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt5w65g4zg, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  5. Michael B Devereux & Gregor W Smith & James Yetman, 2009. "Consumption and real exchange rates in professional forecasts," BIS Working Papers, Bank for International Settlements 295, Bank for International Settlements.
  6. Xavier Sala-I-Martin & Gernot Doppelhofer & Ronald I. Miller, 2004. "Determinants of Long-Term Growth: A Bayesian Averaging of Classical Estimates (BACE) Approach," American Economic Review, American Economic Association, American Economic Association, vol. 94(4), pages 813-835, September.
  7. Yu-chin Chen & Kwok Ping Tsang, 2010. "A Macro-Finance Approach to Exchange Rate Determination," Working Papers, Virginia Polytechnic Institute and State University, Department of Economics e07-19, Virginia Polytechnic Institute and State University, Department of Economics.
  8. Adrien Verdelhan & Hanno Lustig, 2005. "The Cross-Section Of Foreign Currency Risk Premia And Consumption Growth Risk," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2005-019, Boston University - Department of Economics.
  9. Emmanuel Farhi, 2008. "Rare Disasters and Exchange Rates," 2008 Meeting Papers, Society for Economic Dynamics 47, Society for Economic Dynamics.
  10. Djavad Salehi-Isfahani, 2007. "Poverty, Inequality, and Populist Politics in Iran," Working Papers, Virginia Polytechnic Institute and State University, Department of Economics e07-1, Virginia Polytechnic Institute and State University, Department of Economics.
  11. Timmermann, Allan G, 2005. "Forecast Combinations," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5361, C.E.P.R. Discussion Papers.
  12. Charles Engel & Nelson C. Mark & Kenneth D. West, 2008. "Exchange Rate Models Are Not As Bad As You Think," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2007, Volume 22, pages 381-441 National Bureau of Economic Research, Inc.
  13. Gourinchas, Pierre-Olivier & Tornell, Aaron, 2004. "Exchange rate puzzles and distorted beliefs," Journal of International Economics, Elsevier, Elsevier, vol. 64(2), pages 303-333, December.
  14. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, Elsevier, vol. 14(1-2), pages 3-24, February.
  15. Djavad Salehi-Isfahani & Daniel Egel, 2007. "Youth Exclusion in Iran: The State of Education, Employment and Family Formation," Working Papers, Virginia Polytechnic Institute and State University, Department of Economics e07-2, Virginia Polytechnic Institute and State University, Department of Economics.
  16. Bacchetta, Philippe & Mertens, Elmar & van Wincoop, Eric, 2006. "Predictability in Financial Markets: What Do Survey Expectations Tell Us?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5770, C.E.P.R. Discussion Papers.
  17. Fatma El-Hamidi, 2006. "General or Vocational Schooling? Evidence on School Choice, Returns, and 'Sheepskin' Effects from Egypt 1998," Journal of Economic Policy Reform, Taylor & Francis Journals, Taylor & Francis Journals, vol. 9(2), pages 157-176.
  18. Monika Piazzesi & Martin Schneider, 2009. "Trend and cycle in bond premia," Staff Report, Federal Reserve Bank of Minneapolis 424, Federal Reserve Bank of Minneapolis.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:vpi:wpaper:e07-18. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Djavad Salehi-Isfahani).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.