Switching Between Expectation Processes in the Foreign Exchange Market: A Probabilistic Approach Using Survey Data
This paper relaxes a fundamental hypothesis commonly accepted in the expectation formation literature: expectations are, unchangingly, either rational or generated by one of the three simple extrapolative, regressive or adaptive processes. Using expectations survey data provided by Consensus Forecasts on six European exchange rates against the US Dollar, we find that the rational expectations hypothesis is rejected at the aggregate level. By implementing a switching regression methodology with stochastic choice of regime, we show that the expectation generating process is given at any time by some combination of the three simple processes. An interpretation of this framework in terms of economically rational expectations is suggested.
|Date of creation:||Sep 2007|
|Publication status:||Published in Review of International Economics, Wiley, 2007, 15 (4), pp.700-719|
|Note:||View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00081586|
|Contact details of provider:|| Web page: https://hal.archives-ouvertes.fr/|
When requesting a correction, please mention this item's handle: RePEc:hal:journl:halshs-00081586. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD)
If references are entirely missing, you can add them using this form.