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Individual exchange rate forecasts and expected fundamentals

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  • Dick, Christian D.
  • MacDonald, Ronald
  • Menkhoff, Lukas

Abstract

This paper suggests that exchange rates are related to economic fundamentals over medium-term horizons, such as a month or longer. We find from a large panel of individual professionals' forecasts that good exchange rate forecasts benefit from the proper understanding of fundamentals, specifically good interest rate forecasts. This relation is robust to individual fixed effects and further controls. Reassuringly, this relation is stronger during obvious fundamental misalignment. This occurs when exchange rates substantially deviate from their PPP values, when interest rate differentials are high and when exchange rates are less influenced by strong momentum. --

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Bibliographic Info

Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 11-062.

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Date of creation: 2011
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Handle: RePEc:zbw:zewdip:11062

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Keywords: Exchange Rate Determination; Individual Expectations; Macroeconomic Fundamentals;

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References

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  1. Rime, Dagfinn & Sarno, Lucio & Sojli, Elvira, 2009. "Exchange Rate Forecasting, Order Flow and Macroeconomic Information," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7225, C.E.P.R. Discussion Papers.
  2. Backus, David K & Gregory, Allan W & Telmer, Chris I, 1993. " Accounting for Forward Rates in Markets for Foreign Currency," Journal of Finance, American Finance Association, American Finance Association, vol. 48(5), pages 1887-1908, December.
  3. Benassy-Quere, Agnes & Larribeau, Sophie & MacDonald, Ronald, 2003. "Models of exchange rate expectations: how much heterogeneity?," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 13(2), pages 113-136, April.
  4. Menkhoff, Lukas & Sarno, Lucio & Schmeling, Maik & Schrimpf, Andreas, 2011. "Carry Trades and Global Foreign Exchange Volatility," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8291, C.E.P.R. Discussion Papers.
  5. Yin-Wong Cheung & Antonio Garcia Pascual & Menzie David Chinn, 2004. "Empirical Exchange Rate Models of the Nineties," IMF Working Papers 04/73, International Monetary Fund.
  6. Òscar Jordà & Alan M. Taylor, 2011. "Performance Evaluation of Zero Net-Investment Strategies," NBER Working Papers 17150, National Bureau of Economic Research, Inc.
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  8. Maik Schmeling & Andreas Schrimpf, 2008. "Expected Inflation, Expected Stock Returns, and Money Illusion: What can we learn from Survey Expectations?," SFB 649 Discussion Papers SFB649DP2008-036, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  9. Philippe Bacchetta & Eric van Wincoop, 2009. "On the Unstable Relationship between Exchange Rates and Macroeconomic Fundamentals," Working Papers 272009, Hong Kong Institute for Monetary Research.
  10. Jordà, Òscar & Taylor, Alan M., 2012. "The carry trade and fundamentals: Nothing to fear but FEER itself," Journal of International Economics, Elsevier, Elsevier, vol. 88(1), pages 74-90.
  11. Christopoulos, Dimitris K. & León-Ledesma, Miguel A., 2010. "Smooth breaks and non-linear mean reversion: Post-Bretton Woods real exchange rates," Journal of International Money and Finance, Elsevier, Elsevier, vol. 29(6), pages 1076-1093, October.
  12. Anatolyev, Stanislav & Gerko, Alexander, 2005. "A Trading Approach to Testing for Predictability," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 23, pages 455-461, October.
  13. Rossi, Barbara, 2002. "Testing Long-horizon Predictive Ability with High Persistence, and the Meese-Rogoff Puzzle," Working Papers, Duke University, Department of Economics 02-10, Duke University, Department of Economics.
  14. Christian Dreger & Georg Stadtmann, 2006. "What Drives Heterogeneity in Foreign Exchange Rate Expectations: Deep Insights from a New Survey," Discussion Papers of DIW Berlin 624, DIW Berlin, German Institute for Economic Research.
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Cited by:
  1. Christian D. Dick & Lukas Menkhoff, 2013. "Exchange Rate Expectations of Chartists and Fundamentalists," CESifo Working Paper Series 4181, CESifo Group Munich.

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