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Do market participants’ forecasts of financial variables outperform the random-walk benchmark?

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  • Kladívko, Kamil
  • Österholm, Pär

Abstract

In this paper, we evaluate the forecasting precision of survey expectations of the four financial variables in the Prospera survey commissioned by Sveriges Riksbank – one of Sweden's most important economic surveys. Our analysis shows that the market participants in the survey are able to significantly outperform the random walk for only one horizon and variable, namely the three-month horizon for the repo rate. At the longest horizon for the repo rate, and at all horizons for the five-year government bond yield, the random walk significantly outperforms the market participants. For the exchange-rate data studied – SEK/USD and SEK/EUR – no significant differences in forecasting precision in favour of the survey expectations can be established. We conclude that while the Prospera survey might be informative regarding the market participants’ expectations, it does not seem to carry much information about the actual future developments of the exchange rates and interest rates covered by the survey.

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  • Kladívko, Kamil & Österholm, Pär, 2021. "Do market participants’ forecasts of financial variables outperform the random-walk benchmark?," Finance Research Letters, Elsevier, vol. 40(C).
    • Handle: RePEc:eee:finlet:v:40:y:2021:i:c:s1544612319313443
    DOI: 10.1016/j.frl.2020.101712
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    2. Kiss, Tamás & Kladívko, Kamil & Silfverberg, Oliwer & Österholm, Pär, 2023. "Market participants or the random walk – who forecasts better? Evidence from micro-level survey data," Finance Research Letters, Elsevier, vol. 54(C).

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    More about this item

    Keywords

    Out-of-sample forecasts; Exchange rates; Interest rates;
    All these keywords.

    JEL classification:

    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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