EconPapers    
Economics at your fingertips  
 

Expectation formation in the foreign exchange market: a time-varying heterogeneity approach using survey data

Georges Prat and Remzi Uctum ()

Applied Economics, 2015, vol. 47, issue 34-35, 3673-3695

Abstract: Using Consensus Economics survey data on JPY/USD and GBP/USD exchange rate expectations for the 3- and 12-month horizons over the period November 1989-December 2012, we first show that expectations fail the conventional tests of unbiasedness and do not exhibit a learning process towards rationality. Our approach is consistent with the economically rational expectations theory (Feige and Pearce, 1976), which states that information costs and agents' aversion to misestimating future exchange rates determine the optimal amounts of information on which they base their expectations. The time variability of the cost/aversion ratios justifies at the aggregate level a representation of expectations as a linear combination of the traditional extrapolative, adaptive and regressive processes augmented by a forward market component, whose parameters are allowed to change over time. This mixed expectation model with unstable heterogeneity is validated by our Kalman filter estimation results for the two currencies and the two horizons considered. Although the relative importance of the 'fundamentalists' ('chartists') is found to increase (decrease) with the time-horizon, chartist behaviour appears to dominate fundamentalist behaviour for both horizons. Central bank intervention is then effective in stabilizing the foreign exchange markets if it encourages fundamentalist activity.

Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link)
http://hdl.handle.net/10.1080/00036846.2015.1021460 (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: Expectation formation in the foreign exchange market: a time-varying heterogeneity approach using survey data (2015)
Working Paper: Expectation formation in the foreign exchange market: a time-varying heterogeneity approach using survey data (2014) Downloads
Working Paper: Expectation formation in the foreign exchange market: a time varying heterogeneity approach using survey data (2014)
Working Paper: Expectation formation in the foreign exchange market: a time varying heterogeneity approach using survey data (2014)
Working Paper: Expectation formation in the foreign exchange market: a time-varying heterogeneity approach using survey data (2014)
Working Paper: Expectation formation in the foreign exchange market: a time varying heterogeneity approach using survey data (2014)
Working Paper: Expectation formation in the foreign exchange market: a time-varying heterogeneity approach using survey data (2014) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:applec:v:47:y:2015:i:34-35:p:3673-3695

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAEC20

DOI: 10.1080/00036846.2015.1021460

Access Statistics for this article

Applied Economics is currently edited by Anita Phillips

More articles in Applied Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().

 
Page updated 2021-06-18
Handle: RePEc:taf:applec:v:47:y:2015:i:34-35:p:3673-3695