Switching between Expectation Processes in the Foreign Exchange Market: a Probabilistic Approach using Survey Data *

Georges Prat and Remzi Uctum

Review of International Economics, 2007, vol. 15, issue 4, pages 700-719

Abstract: 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. Copyright © 2007 The Authors; Journal compilation © 2007 Blackwell Publishing Ltd.

Downloads: (external link)
http://www.blackwell ... .00684.x/enhancedabs link to full text (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Ordering information: This journal article can be ordered from
http://www.blackwell ... bs.asp?ref=0965-7576

Access Statistics for this article

Review of International Economics is edited by E. Kwan Choi

More articles in Review of International Economics from Blackwell Publishing
Series data maintained by Christopher F. Baum ().