Do dollar forecasters believe too much in PPP?
This article extends earlier studies on exchange-rate expectations' formation by using new data and adding information about forecasters' reliance on fundamental analysis for the first time. We replicate the conventional result of nonrational expectations. Moreover, biases in expectations are identified as professionals significantly believe too much in mean reversion, mean being represented by purchasing power parity (PPP). When respondents are grouped on their reliance to fundamental analysis, fundamentalists reveal an even stronger bias. Those, who rely the least on fundamentals - preferring technical analysis instead - show a significantly smaller bias towards PPP in lieu of expecting too much trend extrapolation. Biased beliefs will grow stronger when the US Dollar is further away from PPP. Finally, the accuracy of the expectations is poor for both groups, however, we find directional forecasting ability.
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Volume (Year): 40 (2008)
Issue (Month): 3 ()
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