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What drives heterogeneity in foreign exchange rate expectations: insights from a new survey

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  • Christian Dreger

    (DIW Berlin, Germany)

  • Georg Stadtmann

Abstract

Foreign exchange rate expectations play a central role in virtually all monetary models for the open economy. Therefore, it is extremely important to gain empirical insights into the expectations formation process. In this paper, we use a unique disaggregated data set to model the expectations of the Yen|USD exchange rate of about 50 leading foreign exchange rate professionals. The survey includes not only exchange rate projections but also expectations regarding macroeconomic fundamentals, like GDP growth, inflation, and interest rates. Different expectations of fundamentals can lead to different views of exchange rate dynamics. Using panel models, we are able to confirm the heterogeneity of exchange rate expectations often detected in previous studies. More important, we provide strong evidence regarding the likely source of heterogeneity. In line with forward looking models for the exchange rate, expected fundamentals have a substantial impact on exchange rate expectations, thereby challenging the backward looking evidence from previous studies. However, the heterogeneity in the expectations of macroeconomic fundamentals is not sufficient to explain the heterogeneity in exchange rate expectations. Copyright © 2007 John Wiley & Sons, Ltd.

Suggested Citation

  • Christian Dreger & Georg Stadtmann, 2008. "What drives heterogeneity in foreign exchange rate expectations: insights from a new survey," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(4), pages 360-367.
  • Handle: RePEc:ijf:ijfiec:v:13:y:2008:i:4:p:360-367
    DOI: 10.1002/ijfe.359
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    References listed on IDEAS

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    Cited by:

    1. Wan, Jer-Yuh & Kao, Chung-Wei, 2009. "Evidence on the contrarian trading in foreign exchange markets," Economic Modelling, Elsevier, vol. 26(6), pages 1420-1431, November.
    2. Reitz, Stefan & Stadtmann, Georg & Taylor, Mark P., 2010. "The effects of Japanese interventions on FX-forecast heterogeneity," Economics Letters, Elsevier, vol. 108(1), pages 62-64, July.
    3. Hommes, Cars, 2011. "The heterogeneous expectations hypothesis: Some evidence from the lab," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 1-24, January.
    4. Christian Pierdzioch & Georg Stadtmann & Dirk Schäfer, 2011. "Fly with the Eagles or Scratch with the Chickens? – Zum Herdenverhalten von Wechselkursprognostikern," Credit and Capital Markets, Credit and Capital Markets, vol. 44(4), pages 465-490.
    5. Dick, Christian D. & MacDonald, Ronald & Menkhoff, Lukas, 2015. "Exchange rate forecasts and expected fundamentals," Journal of International Money and Finance, Elsevier, vol. 53(C), pages 235-256.
    6. repec:eee:jmacro:v:53:y:2017:i:c:p:162-175 is not listed on IDEAS
    7. Chortareas, Georgios & Jitmaneeroj, Boonlert & Wood, Andrew, 2012. "Forecast rationality and monetary policy frameworks: Evidence from UK interest rate forecasts," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(1), pages 209-231.
    8. Ince, Onur & Molodtsova, Tanya, 2017. "Rationality and forecasting accuracy of exchange rate expectations: Evidence from survey-based forecasts," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 47(C), pages 131-151.
    9. Kunze, Frederik, 2017. "Predicting exchange rates in Asia: New insights on the accuracy of survey forecasts," Center for European, Governance and Economic Development Research Discussion Papers 326, University of Goettingen, Department of Economics.

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