The Scapegoat Theory of Exchange Rates: The First Tests

Marcel Fratzscher, Lucio Sarno and Gabriele Zinna

No 1290, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: This paper provides an empirical test of the scapegoat theory of exchange rates (Bacchetta and van Wincoop 2004, 2011). This theory suggests that market participants may at times attach significantly more weight to individual economic fundamentals to rationalize the pricing of currencies, which are partly driven by unobservable shocks. Using novel survey data which directly measure foreign exchange scapegoats for 12 currencies and proprietary data on order flow, we find empirical evidence that strongly supports the scapegoat theory of exchange rates, with the resulting models explaining a large fraction of the variation and directional changes in exchange rates.

Keywords: scapegoat; exchange rates; economic fundamentals; survey data (search for similar items in EconPapers)
JEL-codes: F31 G10 (search for similar items in EconPapers)
Pages: 52 : Anh. p.
Date: 2013
New Economics Papers: this item is included in nep-mon and nep-opm
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https://www.diw.de/documents/publikationen/73/diw_01.c.420753.de/dp1290.pdf (application/pdf)

Related works:
Journal Article: The scapegoat theory of exchange rates: the first tests (2015)
Working Paper: The scapegoat theory of exchange rates: the first tests (2014)
Working Paper: The Scapegoat Theory of Exchange Rates: The First Tests (2012)
Working Paper: The scapegoat theory of exchange rates: the first tests (2012)
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