IDEAS home Printed from https://ideas.repec.org/p/diw/diwwpp/dp624.html
   My bibliography  Save this paper

What Drives Heterogeneity in Foreign Exchange Rate Expectations: Deep Insights from a New Survey

Author

Listed:
  • Christian Dreger
  • Georg Stadtmann

Abstract

Foreign exchange rate expectations play a central role in virtually all monetary models for the open economy. Therefore, it is extremely important to gain empirical insights into the expectations formation process. In this paper, we use a unique disaggregated data set to model the expectations of the Yen/USD exchange rate of about 50 leading foreign exchange rate professionals. The survey includes not only forecasts of the exchange rate, but also for macroeconomic fundamentals, like GDP growth, inflation, and interest rates. Different expectations of fundamentals might lead to different views of exchange rate dynamics. Using panel models, we are able to confirm the heterogeneity of exchange rate expectations often detected by former authors. More important, we provide strong evidence regarding the likely source of heterogeneity. In line with forward looking models for the exchange rate, expected fundamentals have a substantial impact on exchange rate expectations, thereby challenging the backward looking evidence of previous studies. However, the heterogeneity in the expectations of macroeconomic fundamentals is not sufficient to explain the heterogeneity in exchange rate expectations.

Suggested Citation

  • Christian Dreger & Georg Stadtmann, 2006. "What Drives Heterogeneity in Foreign Exchange Rate Expectations: Deep Insights from a New Survey," Discussion Papers of DIW Berlin 624, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp624
    as

    Download full text from publisher

    File URL: https://www.diw.de/documents/publikationen/73/diw_01.c.44708.de/dp624.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Remzi Uctum & Georges Prat, 2000. "The evidence of a mixed expectation generating process in the foreign exchange market," Post-Print halshs-00081614, HAL.
    2. Cavaglia, Stefano & Verschoor, Willem F. C. & Wolff, Christian C. P., 1993. "Further evidence on exchange rate expectations," Journal of International Money and Finance, Elsevier, vol. 12(1), pages 78-98, February.
    3. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, vol. 77(1), pages 133-153, March.
    4. Martin D.D. Evans & Richard K. Lyons, 2004. "A New Micro Model of Exchange Rate Dynamics," NBER Working Papers 10379, National Bureau of Economic Research, Inc.
    5. Elliott, Graham & Ito, Takatoshi, 1999. "Heterogeneous expectations and tests of efficiency in the yen/dollar forward exchange rate market," Journal of Monetary Economics, Elsevier, vol. 43(2), pages 435-456, April.
    6. Robert A. Eisenbeis & Daniel F. Waggoner & Tao Zha, 2002. "Evaluating Wall Street Journal survey forecasters: a multivariate approach," FRB Atlanta Working Paper 2002-8, Federal Reserve Bank of Atlanta.
    7. François Gardes & Georges Prat (ed.), 2000. "Price Expectations in Goods and Financial Markets," Books, Edward Elgar Publishing, number 2016.
    8. Jeffrey A. Frankel & Kenneth Froot, 1990. "Exchange Rate Forecasting Techniques, Survey Data, and Implications for the Foreign Exchange Market," NBER Working Papers 3470, National Bureau of Economic Research, Inc.
    9. Benassy-Quere, Agnes & Larribeau, Sophie & MacDonald, Ronald, 2003. "Models of exchange rate expectations: how much heterogeneity?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 13(2), pages 113-136, April.
    10. Greer, Mark, 2003. "Directional accuracy tests of long-term interest rate forecasts," International Journal of Forecasting, Elsevier, vol. 19(2), pages 291-298.
    11. Allen, Helen & Taylor, Mark P, 1990. "Charts, Noise and Fundamentals in the London Foreign Exchange Market," Economic Journal, Royal Economic Society, vol. 100(400), pages 49-59, Supplemen.
    12. Shinji Takagi, 1991. "Exchange Rate Expectations: A Survey of Survey Studies," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 156-183, March.
    13. Ito, Takatoshi, 1990. "Foreign Exchange Rate Expectations: Micro Survey Data," American Economic Review, American Economic Association, vol. 80(3), pages 434-449, June.
    14. Georges Prat & François Gardes, 2000. "Price expectations in goods and financial markets," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00172996, HAL.
    15. Cho, Dong W. & Hersch, Philip L., 1998. "Forecaster Characteristics and Forecast Outcomes," Journal of Economics and Business, Elsevier, vol. 50(1), pages 39-48, January.
    16. Mussa, Michael, 1982. "A Model of Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 90(1), pages 74-104, February.
    17. MacDonald, Ronald & Torrance, T S, 1988. "On Risk, Rationality and Excessive Speculation in the Deutschmark-U.S. Dollar Exchange Market: Some Evidence Using Survey Data," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 50(2), pages 107-123, May.
    18. Kolb, R. A. & Stekler, H. O., 1996. "Is there a consensus among financial forecasters?," International Journal of Forecasting, Elsevier, vol. 12(4), pages 455-464, December.
    19. Ehrmann, Michael & Fratzscher, Marcel, 2005. "Exchange rates and fundamentals: new evidence from real-time data," Journal of International Money and Finance, Elsevier, vol. 24(2), pages 317-341, March.
    20. Cheung, Yin-Wong & Wong, Clement Yuk-Pang, 2000. "A survey of market practitioners' views on exchange rate dynamics," Journal of International Economics, Elsevier, vol. 51(2), pages 401-419, August.
    21. Jeffrey A. Frankel & Kenneth A. Froot, 1985. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc.
    22. Macdonald, Ronald & Marsh, Ian W., 1996. "Currency forecasters are heterogeneous: confirmation and consequences," Journal of International Money and Finance, Elsevier, vol. 15(5), pages 665-685, October.
    23. Mark, Nelson C, 1995. "Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability," American Economic Review, American Economic Association, vol. 85(1), pages 201-218, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Christian Pierdzioch & Jan-Christoph Rülke & Georg Stadtmann, 2012. "A Note on Forecasting Emerging Market Exchange Rates: Evidence of Anti-herding," Review of International Economics, Wiley Blackwell, vol. 20(5), pages 974-984, November.
    2. Bernhard O. Ishioro, 2014. "The Dynamics Of Exchange Rate Expectations Formation: The Nigerian Perspective," Economic Thought and Practice, Department of Economics and Business, University of Dubrovnik, vol. 23(2), pages 431-460, december.
    3. Dick, Christian D. & MacDonald, Ronald & Menkhoff, Lukas, 2011. "Individual exchange rate forecasts and expected fundamentals," ZEW Discussion Papers 11-062, ZEW - Leibniz Centre for European Economic Research.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Christian Dreger & Georg Stadtmann, 2008. "What drives heterogeneity in foreign exchange rate expectations: insights from a new survey," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 13(4), pages 360-367.
    2. Georges Prat & Remzi Uctum, 2015. "Expectation formation in the foreign exchange market: a time-varying heterogeneity approach using survey data," Applied Economics, Taylor & Francis Journals, vol. 47(34-35), pages 3673-3695, July.
    3. Ruelke, Jan C. & Frenkel, Michael R. & Stadtmann, Georg, 2010. "Expectations on the yen/dollar exchange rate - Evidence from the Wall Street Journal forecast poll," Journal of the Japanese and International Economies, Elsevier, vol. 24(3), pages 355-368, September.
    4. Frenkel, Michael & Rülke, Jan-Christoph & Stadtmann, Georg, 2009. "Two currencies, one model? Evidence from the Wall Street Journal forecast poll," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(4), pages 588-596, October.
    5. Benassy-Quere, Agnes & Larribeau, Sophie & MacDonald, Ronald, 2003. "Models of exchange rate expectations: how much heterogeneity?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 13(2), pages 113-136, April.
    6. Ron Jongen & Willem F.C. Verschoor & Christian C.P. Wolff, 2008. "Foreign Exchange Rate Expectations: Survey And Synthesis," Journal of Economic Surveys, Wiley Blackwell, vol. 22(1), pages 140-165, February.
    7. Audretsch, David B. & Stadtmann, Georg, 2005. "Biases in FX-forecasts: Evidence from panel data," Global Finance Journal, Elsevier, vol. 16(1), pages 99-111, August.
    8. Koske, Isabell & Stadtmann, Georg, 2009. "Exchange rate expectations: The role of person specific forward looking variables," Economics Letters, Elsevier, vol. 105(3), pages 221-223, December.
    9. Ronald MacDonald & Lukas Menkhoff & Rafael R. Rebitzky, 2009. "Exchange Rate Forecasters' Performance: Evidence of Skill?," CESifo Working Paper Series 2615, CESifo.
    10. Bernhard O. Ishioro, 2014. "The Dynamics Of Exchange Rate Expectations Formation: The Nigerian Perspective," Economic Thought and Practice, Department of Economics and Business, University of Dubrovnik, vol. 23(2), pages 431-460, december.
    11. Georges Prat & Remzi Uctum, 2014. "Expectation formation in the foreign exchange market: a time-varying heterogeneity approach using survey data," Working Papers hal-04141348, HAL.
    12. Wolff, Christian & Verschoor, Willem F C & Jongen, Ron & Zwinkels, Remco C.J., 2008. "Dispersion of Beliefs in the Foreign Exchange Market," CEPR Discussion Papers 6738, C.E.P.R. Discussion Papers.
    13. Ince, Onur & Molodtsova, Tanya, 2017. "Rationality and forecasting accuracy of exchange rate expectations: Evidence from survey-based forecasts," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 47(C), pages 131-151.
    14. Richard H. Cohen & Carl Bonham, 2007. "Specifying the Forecast Generating Process for Exchange Rate Survey Forecasts," Working Papers 200718, University of Hawaii at Manoa, Department of Economics.
    15. MacDonald, Ronald & Menkhoff, Lukas & Rebitzky, Rafael R., 2009. "Exchange rate forecasters’ performance: evidence of skill?," SIRE Discussion Papers 2009-10, Scottish Institute for Research in Economics (SIRE).
    16. Ronald MacDonald, 2000. "Expectations Formation and Risk in Three Financial Markets: Surveying What the Surveys Say," Journal of Economic Surveys, Wiley Blackwell, vol. 14(1), pages 69-100, February.
    17. Eun, Cheol S. & Sabherwal, Sanjiv, 2002. "Forecasting exchange rates: Do banks know better?," Global Finance Journal, Elsevier, vol. 13(2), pages 195-215.
    18. Fritsche, Ulrich & Pierdzioch, Christian & Rülke, Jan-Christoph & Stadtmann, Georg, 2015. "Forecasting the Brazilian real and the Mexican peso: Asymmetric loss, forecast rationality, and forecaster herding," International Journal of Forecasting, Elsevier, vol. 31(1), pages 130-139.
    19. Andrade, Sandro C. & Kohlscheen, Emanuel, 2010. "Pessimistic Foreign Investors and Turmoil in Emerging Markets : The Case of Brazil in 2002," The Warwick Economics Research Paper Series (TWERPS) 926, University of Warwick, Department of Economics.
    20. Prat, Georges & Uctum, Remzi, 2013. "Modeling the horizon-dependent ex-ante risk premium in the foreign exchange market: Evidence from survey data," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 33-54.

    More about this item

    Keywords

    Exchange rate expectations; heterogeneity of expectations; expected fundamentals;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:diw:diwwpp:dp624. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Bibliothek (email available below). General contact details of provider: https://edirc.repec.org/data/diwbede.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.