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Forecaster Rationality and Expectation Formation in Foreign Exchange Markets: Do Emerging Markets Differ from Industrialized Economies?

Listed author(s):
  • Michael Frenkel
  • Matthias Mauch

    ()

  • Jan-Christoph Rülke
Registered author(s):

    This paper uses the Consensus Economic Forecast poll to investigate how forecasters in the foreign exchange market form expectations. In order to explain the expectation formation of forecasters, around 50,000 forecasts for 22 OECD-member currencies are analyzed. The results indicate that forecasters do not form expectations rationally when tested for unbiasedness and orthogonality. The results also suggest that forecasts for industrialized economies show a mix of trend-following and fundamentally-oriented behavior. By contrast, forecasts for emerging markets show significantly more destabilizing expectations. We find forecasting tendencies to strengthen in the short-run and medium-run when controlling for the Balassa-Samuelson effect. For long-run forecasts however this can not be confirmed.

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    File URL: http://nbn-resolving.org/urn:nbn:de:hbz:992-opus4-4036
    File Function: First version, 2017
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    Paper provided by WHU - Otto Beisheim School of Management in its series WHU Working Paper Series - Economics Group with number 17-04.

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    Length: 31 pages
    Date of creation: 26 Apr 2017
    Handle: RePEc:whu:wpaper:17-04
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