Long-Horizon Exchange Rate Expectations

Lukas Kremens, Ian Martin and Liliana Varela

No 18412, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study exchange rate expectations in surveys of financial professionals and find that they successfully forecast currency appreciation at the two-year horizon, both in and out of sample. Exchange rate expectations are also interpretable, in the sense that three macro-finance variables -the risk-neutral covariance between the exchange rate and equity market, the real exchange rate, and the current account relative to GDP- explain most of their variation. Moreover, there is no "secret sauce" in expectations: after controlling for the three macro-finance variables, the residual information in survey expectations does not forecast currency appreciation in our sample.

Keywords: Quanto contracts; Expectations (search for similar items in EconPapers)
JEL-codes: F31 G15 G17 (search for similar items in EconPapers)
Date: 2023-09
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