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Exchange Rate Forecasters' Performance: Evidence of Skill?

  • Ronald MacDonald
  • Lukas Menkhoff
  • Rafael R. Rebitzky

This paper sheds new light on a long-standing puzzle in the international finance literature, namely, that exchange rate expectations appear inaccurate and even irrational. We find for a comprehensive dataset that individual forecasters’ performance is skill-based. ‘Superior’ forecasters show consistent ability as their forecasting success holds across currencies. They seem to possess knowledge on the role of fundamentals in explaining exchange rate behavior, as indicated by better interest rate forecasts. Superior forecasters are more experienced than the median forecaster and have fewer personnel responsibilities. Accordingly, foreign exchange markets may function in less puzzling and irrational ways than is often thought.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 2615.

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Date of creation: 2009
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Handle: RePEc:ces:ceswps:_2615
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