Forecaster rationality and expectation formation in foreign exchange markets
- 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.
| Author: | Michael Frenkel, Matthias Mauch, Jan-Christoph Rülke |
|---|---|
| URN: | urn:nbn:de:hbz:992-opus4-4036 |
| ISSN: | 2511-1159 |
| Subtitle (English): | Do emerging markets differ from industrialized economies? |
| Series (Serial Number): | WHU – Working Paper Series in Economics (WP 17/04) |
| Publisher: | WHU |
| Place of publication: | Vallendar |
| Document Type: | Working Paper |
| Language: | English |
| Date of Publication (online): | 2017/06/01 |
| Publishing Institution: | WHU - Otto Beisheim School of Management |
| Release Date: | 2017/06/01 |
| Tag: | Balassa-Samuelson; Chartist; Expectation formation; Forecast bias; Foreign exchange; Fundamentalist |
| Volume: | 2017 |
| Issue: | WP 17/04 |
| Page Number: | 31 |
| JEL-Classification: | C Mathematical and Quantitative Methods / C3 Multiple or Simultaneous Equation Models / C33 Models with Panel Data |
| D Microeconomics / D4 Market Structure and Pricing / D49 Other | |
| F International Economics / F3 International Finance / F31 Foreign Exchange | |
| Licence (German): |  Copyright for this publication |
