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Long-horizon exchange rate expectations

Author

Listed:
  • Kremens, Lukas
  • Martin, Ian
  • Varela, Liliana

Abstract

We study exchange rate expectations in surveys of financial professionals and find that they successfully forecast currency appreciation at the two-year horizon, both in and out of sample. Exchange rate expectations are also interpretable, in the sense that three macrofinance variables—the risk-neutral covariance between the exchange rate and equity market, the real exchange rate, and the current account relative to GDP—explain most of their variation. But there is no “secret sauce” in expectations: after controlling for the three macro-finance variables, the residual information in survey expectations does not forecast currency appreciation in our sample.

Suggested Citation

  • Kremens, Lukas & Martin, Ian & Varela, Liliana, 2025. "Long-horizon exchange rate expectations," LSE Research Online Documents on Economics 127790, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:127790
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    File URL: http://eprints.lse.ac.uk/127790/
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    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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