The evidence of a mixed expectation generating process in the foreign exchange market

Using expectations of six main exchange rates provided by Consensus Forecast surveys, the authors show that none of the traditional extrapolative, regressive and adaptive processes is by itself sufficient to account for expectations. However, a weighted average of these three basic processes appears to be successful in explaining the exchange rate expectations for each of the six currencies considered. Moreover, the authors show by using a pooled data sample that the same set of paerameters holds for all currencies, and this suggests that agents generate their expectations using the same mixed process irrespective of the currency. The coefficients of the mixed model, however, are characterized by time instability, and alternative hypotheses are suggested to explain this last result.