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Tests of Rationality in Turkish Foreign Exchange Market

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  • Neslihan Topbas

Abstract

The rationality of expectations has been tested in many foreign exchange markets using survey data. This study is aimed at gaining empirical insights about the expectations of market participants in the Turkish foreign exchange market. Using survey data provided by Central Bank of Turkey on the exchange rate of the Turkish lira against the US dollar, it is determined that the mean of expectations of market participants for one year and one month ahead were higher than the mean of actual depreciation. The analysis resulted in rejection of the popular test for forward exchange rate unbiasedness in predicting the future spot exchange rate. Another test of rationality has also been checked and the result has been rejection as well, which can be interpreted that the forward premium contains additional information for exchange rate forecasts.

Suggested Citation

  • Neslihan Topbas, 2014. "Tests of Rationality in Turkish Foreign Exchange Market," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 14(2), pages 65-78.
    • Handle: RePEc:tcb:cebare:v:14:y:2014:i:2:p:65-78
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    References listed on IDEAS

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    Cited by:

    1. Radim Gottwald, 2015. "The Forecasting of Spot Exchange Rates Based on the Forward Exchange Rates," MENDELU Working Papers in Business and Economics 2015-52, Mendel University in Brno, Faculty of Business and Economics.

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    More about this item

    Keywords

    Forward exchange rate; Spot exchange rate; Foreign exchange market; Survey data;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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