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Testing the Properties of Financial Analysts’ Predictions of Future Spot Exchange Rates (Example of CZK/EUR)

Author

Listed:
  • Martin Mandel

    (VSE Prague, FFU, Prague, Czech Republic)

  • Jan Vejmelek

    (Komercni banka, a.s. & VSE Prague, FFU, Praha, Czech Republic)

Abstract

Exchange rate expectations play a key role in several theoretical concepts of international economics. Unfortunately, direct testing of the empirical validity was limited as information about expected future exchange rates was not available and was often replaced by future spot exchange rates or forward rates. This paper used direct exchange rate expectations as a result of a regular survey conducted by the Czech National Bank for the CZK/EUR currency pair on a one-month and one-year horizon. Using econometric tools testing the rational expectations hypothesis and alternative forms of extrapolative and adaptive expectations for the two time periods of 5/1999-12/2007 and 1/2008-12/2019, a conclusion can be drawn that the periods are statistically different. Regarding the formation of expectations, the rational expectations approach was not approved. Nevertheless, properties of extrapolative and adaptive expectations for certain periods and horizons were detected.

Suggested Citation

  • Martin Mandel & Jan Vejmelek, 2021. "Testing the Properties of Financial Analysts’ Predictions of Future Spot Exchange Rates (Example of CZK/EUR)," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 71(1), pages 33-51, June.
    • Handle: RePEc:fau:fauart:v:71:y:2021:i:1:p:33-51
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    File URL: https://journal.fsv.cuni.cz/mag/article/show/id/1479
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    More about this item

    Keywords

    Exchange rate forecasting; rational expectations hypothesis; adaptive expectations;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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