Switching between Expectation Processes in the Foreign Exchange Market: a Probabilistic Approach using Survey Data
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. Copyright © 2007 The Authors; Journal compilation © 2007 Blackwell Publishing Ltd.
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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 15 (2007)
Issue (Month): 4 (09)
|Contact details of provider:|| Web page: http://www.blackwellpublishing.com/journal.asp?ref=0965-7576|
|Order Information:||Web: http://www.blackwellpublishing.com/subs.asp?ref=0965-7576|