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Great expectations? Evidence from Colombia’s exchange rate survey

Juan Echavarría () and Mauricio Villamizar-Villegas ()

Borradores de Economia from Banco de la Republica de Colombia

Abstract: In this document we use the Expectations Survey conducted monthly by the Central Bank of Colombia during the period of October 2003 – August 2012. We find that exchange rate revaluations were generally followed by expectations of further revaluation in the short run (1 month), but by expectations of devaluations in the long run (1 year), and that expectations are stabilizing both in the short and long run. The forward rate is generally different from the future spot rate, mainly because forecast errors are on average different from cero. This suggests that exchange rate expectations are not rational. The role of the risk premium is also important, albeit statistically significant only for the 1 year ahead forecasts (not for 1 month). One month expectations are much better predictors than the models of extrapolative, adaptive or regressive expectations or even the forward discount, and all of them outperform a random walk. But results are almost the opposite for 1 year. In this case traders and analysts could actually do much better by following some simple models or by looking at some key variables rather than by following the strategy that they pursue today..

Keywords: Exchange rate expectations; risk premium; market efficiency; forecasting accuracy; random walk; forward discount; rational expectations hypothesis. (search for similar items in EconPapers)
JEL-codes: C23 C53 C83 F31 F37 (search for similar items in EconPapers)
Pages: 33
Date: 2012-10
New Economics Papers: this item is included in nep-cba, nep-for and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

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Related works:
Journal Article: Great expectations? evidence from Colombia’s exchange rate survey (2016) Downloads
Working Paper: Great expectations? Evidence from Colombia´s exchange rate survey (2012) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bdr:borrec:735

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