Sticking to Their Guns: Short-Horizon Exchange Rate Expectations

Lukas Kremens and Liliana Varela

No 21258, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Short-horizon exchange rate forecasts systematically - and incorrectly - predict a partial reversal of their previous errors, both in consensus and forecaster-by-forecaster measures. This pattern spans almost two-thirds (two-fifths) of the variation in consensus (individual) forecasts and explains their poor predictive performance at short horizons. We decompose short-term forecasts into three orthogonal components correlated with (i) long-term forecasts, (ii) past errors, and (iii) residual noise. The first two components account for three-quarters of forecast variance and strongly predict realizations. But the error-loading component predicts in the wrong direction, offsetting predictive information in the long-term component, and renders the overall forecast uninformative.

Keywords: forecasts (search for similar items in EconPapers)
JEL-codes: F31 G15 G17 (search for similar items in EconPapers)
Date: 2026-03
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