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Great expectations? Evidence from Colombia´s exchange rate survey

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Listed author(s):
  • Juan José Echavarría

    ()

  • Mauricio Villamizar

    ()

Abstract

In this document we use the Expectations Survey conducted monthly by the Central Bank of Colombia during the period of October 2003 - August 2012. We find that exchange rate revaluations were generally followed by expectations of further revaluation in the short run (1 month), but by expectations of devaluations in the long run (1 year), and that expectations are stabilizing both in the short and long run. The forward rate is generally different from the future spot rate, mainly because forecast errors are on average different from cero. This suggests that exchange rate expectations are not rational. The role of the risk premium is also important, albeit statistically significant only for the 1 year ahead forecasts (not for 1 month). One month expectations are much better predictors than the models of extrapolative, adaptive or regressive expectations or even the forward discount, and all of them outperform a random walk. But results are almost the opposite for 1 year. In this case traders and analysts could actually do much better by following some simple models or by looking at some key variables rather than by following the strategy that they pursue today..

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Paper provided by BANCO DE LA REPÚBLICA in its series BORRADORES DE ECONOMIA with number 009999.

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Length: 33
Date of creation: 30 Sep 2012
Handle: RePEc:col:000094:009999
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Keywords: Exchange rate expectations; risk premium; market efficiency; forecasting accuracy; random walk; forward discount; rational expectations hypothesis.;

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Find related papers by JEL classification:
  • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
  • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
  • C83 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Survey Methods; Sampling Methods
  • F31 - International Economics - - International Finance - - - Foreign Exchange
  • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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Cited by:

  1. Juan José Echavarría & Luis Fernando Melo Velandia & Santiago Téllez & Mauricio Villamizar, 2013. "The Impact of Pre-announced Day-to-day Interventions on the Colombian Exchange Rate," BORRADORES DE ECONOMIA 010767, BANCO DE LA REPÚBLICA.
  2. Guido M. Kuersteiner & David C. Phillips & Mauricio Villamizar-Villegas, 2016. "Effective Sterilized Foreign Exchange Intervention? Evidence from a Rule-Based Policy," Borradores de Economia 964, Banco de la Republica de Colombia.

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