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Do analysts' forecasts of term spread differential help predict directional change in exchange rates?

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  • Baghestani, Hamid
  • Toledo, Hugo

Abstract

We show that Blue Chip analysts' forecasts of US-Australia and US-UK exchange rates cannot accurately predict directional change in these exchange rates. The literature suggests that the cross-country term spread differential contains useful information for predicting exchange rates. We show that the difference between analysts' and random walk forecasts of the US-Australia (US-UK) term spread differential has directional predictability for the US-Australia (US-UK) exchange rate for 1997–2007 but not for 2008–2015. For the former period, the predictions generally imply symmetric loss, meaning that they are of value to a user who assigns similar loss to both incorrect upward and downward moves.

Suggested Citation

  • Baghestani, Hamid & Toledo, Hugo, 2017. "Do analysts' forecasts of term spread differential help predict directional change in exchange rates?," International Review of Economics & Finance, Elsevier, vol. 47(C), pages 62-69.
    • Handle: RePEc:eee:reveco:v:47:y:2017:i:c:p:62-69
    DOI: 10.1016/j.iref.2016.10.003
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    Cited by:

    1. Baghestani, Hamid & Chazi, Abdelaziz & Khallaf, Ashraf, 2019. "A directional analysis of oil prices and real exchange rates in BRIC countries," Research in International Business and Finance, Elsevier, vol. 50(C), pages 450-456.
    2. Hamid Baghestani & Jorg Bley, 2020. "Do directional predictions of US gasoline prices reveal asymmetries?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 44(2), pages 348-360, April.
    3. Baghestani, Hamid & Toledo, Hugo, 2019. "Oil prices and real exchange rates in the NAFTA region," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 253-264.

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    More about this item

    Keywords

    Yield curve; Blue Chip survey; Directional accuracy; Symmetric loss;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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