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Long-Horizon Exchange Rate Expectations

Author

Listed:
  • Kremens, Lukas
  • Martin, Ian
  • Varela, Liliana

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.

Suggested Citation

  • Kremens, Lukas & Martin, Ian & Varela, Liliana, 2023. "Long-Horizon Exchange Rate Expectations," CEPR Discussion Papers 18412, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18412
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    More about this item

    Keywords

    Quanto contracts; Expectations;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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