IDEAS home Printed from https://ideas.repec.org/p/syd/wpaper/2123-6735.html
   My bibliography  Save this paper

Testing the Rationality of Exchange Rate and Interest Rate Expectations: An Empirical Study of Australian Survey Based Expectations

Author

Listed:
  • Kim, Suk-Joong

Abstract

This paper examines the rationality and optimality of the survey based expectations of Australian exchange rate and interest rates. One and four week ahead forecast of USD/$A exchange rate and two and four week ahead forecasts of the 190-day bank bill and l0-year bond rates were examined. The actual and expected variables were found to be cointegrated which indicates that the expected future values and the future realisations of the exchange rate and interest rates have long run equilibrium relationships. Estimation techniques that take into account the time-varying nature of the forecast error variance and the linear serial correlation in the form of moving average errors were employed for testing the optimality of the expectations in the cases where the frequency of the expectations data were finer than the forecast horizons. The estimation results show that the rationality of the expectations could not be rejected for all the expectations with the exception of the two week ahead forecast of the 90-day interest rate, which indicates that all available information was used at the time of forming relevant forecasts. The optimality of the expectations as tested through the Unbiased Expectations Hypothesis, is decisively rejected in all cases.

Suggested Citation

  • Kim, Suk-Joong, 1996. "Testing the Rationality of Exchange Rate and Interest Rate Expectations: An Empirical Study of Australian Survey Based Expectations," Working Papers 230, University of Sydney, School of Economics.
    • Handle: RePEc:syd:wpaper:2123/6735
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/2123/6735
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    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. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-853, October.
    4. repec:bla:ecorec:v:67:y:1991:i:198:p:237-42 is not listed on IDEAS
    5. Barnhart, Scott W. & Szakmary, Andrew C., 1991. "Testing the Unbiased Forward Rate Hypothesis: Evidence on Unit Roots, Co-Integration, and Stochastic Coefficients," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 26(2), pages 245-267, June.
    6. Colm Kearney & Ronald Macdonald, 1991. "Efficiency in the Forward Foreign Exchange Market: Weekly Tests of the Australian/US Dollar Exchange Rate January 1984‐March 1987," The Economic Record, The Economic Society of Australia, vol. 67(3), pages 237-242, September.
    7. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    8. Shinji Takagi, 1991. "Exchange Rate Expectations: A Survey of Survey Studies," IMF Staff Papers, Palgrave Macmillan, vol. 38(1), pages 156-183, March.
    9. Baillie, Richard T & Bollerslev, Tim, 2002. "The Message in Daily Exchange Rates: A Conditional-Variance Tale," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 60-68, January.
    10. Bollerslev, Tim, 1987. "A Conditionally Heteroskedastic Time Series Model for Speculative Prices and Rates of Return," The Review of Economics and Statistics, MIT Press, vol. 69(3), pages 542-547, August.
    11. Liu, Peter C. & Maddala, G. S., 1992. "Rationality of survey data and tests for market efficiency in the foreign exchange markets," Journal of International Money and Finance, Elsevier, vol. 11(4), pages 366-381, August.
    12. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    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. Lukas Menkhoff & Rafael Rebitzky & Michael Schroder, 2008. "Do dollar forecasters believe too much in PPP?," Applied Economics, Taylor & Francis Journals, vol. 40(3), pages 261-270.
    2. Chortareas, Georgios & Jitmaneeroj, Boonlert & Wood, Andrew, 2012. "Forecast rationality and monetary policy frameworks: Evidence from UK interest rate forecasts," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(1), pages 209-231.
    3. Prat, Georges & Uctum, Remzi, 2021. "Term structure of interest rates: Modelling the risk premium using a two horizons framework," Journal of Economic Behavior & Organization, Elsevier, vol. 182(C), pages 421-436.
    4. Puah, Chin-Hong & Wong, Shirly Siew-Ling & Habibullah, Muzafar Shah, 2012. "Rationality of business operational forecasts: evidence from Malaysian distributive trade sector," MPRA Paper 37599, University Library of Munich, Germany.
    5. 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.
    6. Anastasiou, Dimitrios, 2020. "Senior bank loan officers' expectations for loan demand: Evidence from the Euro-area," MPRA Paper 98903, University Library of Munich, Germany.
    7. Chin-Hong Puah & Shirly Siew-Ling Wong & Venus Khim-Sen Liew, 2013. "Testing rational expectations hypothesis in the manufacturing sector in Malaysia," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 14(2), pages 303-316, April.
    8. Hogan, Warren P. & Batten, Jonathan A., 2005. "Informed and uninformed trading on the Australian dollar," International Review of Financial Analysis, Elsevier, vol. 14(1), pages 61-75.

    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. Engel, Charles, 1996. "The forward discount anomaly and the risk premium: A survey of recent evidence," Journal of Empirical Finance, Elsevier, vol. 3(2), pages 123-192, June.
    2. Ligeralde, Antonio V., 1997. "Covariance matrix estimators and tests of market efficiency," Journal of International Money and Finance, Elsevier, vol. 16(2), pages 323-343, April.
    3. Bronka Rzepkowski, 2001. "Pouvoir prédictif de la volatilité implicite dans le prix des options de change," Économie et Prévision, Programme National Persée, vol. 148(2), pages 71-97.
    4. Ledenyov, Dimitri O. & Ledenyov, Viktor O., 2015. "Wave function method to forecast foreign currencies exchange rates at ultra high frequency electronic trading in foreign currencies exchange markets," MPRA Paper 67470, University Library of Munich, Germany.
    5. 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.
    6. Agnès Bénassy-Quéré & Hélène Raymond, 1996. "Les erreurs de prévision de change ont-elles des caractéristiques hétérogènes ?," Économie et Prévision, Programme National Persée, vol. 125(4), pages 137-157.
    7. Lukas Menkhoff & Rafael Rebitzky & Michael Schroder, 2008. "Do dollar forecasters believe too much in PPP?," Applied Economics, Taylor & Francis Journals, vol. 40(3), pages 261-270.
    8. 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.
    9. Meddahi, N., 2001. "An Eigenfunction Approach for Volatility Modeling," Cahiers de recherche 2001-29, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    10. Christian Bontemps & Nour Meddahi, 2012. "Testing distributional assumptions: A GMM aproach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 27(6), pages 978-1012, September.
    11. Rich, R W & Raymond, J E & Butler, J S, 1992. "The Relationship between Forecast Dispersion and Forecast Uncertainty: Evidence from a Survey Data-ARCH Model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 7(2), pages 131-148, April-Jun.
    12. Mohammadi, Hassan & Su, Lixian, 2010. "International evidence on crude oil price dynamics: Applications of ARIMA-GARCH models," Energy Economics, Elsevier, vol. 32(5), pages 1001-1008, September.
    13. Bontemps, Christian & Meddahi, Nour, 2005. "Testing normality: a GMM approach," Journal of Econometrics, Elsevier, vol. 124(1), pages 149-186, January.
    14. Tim Bollerslev & Robert J. Hodrick, 1992. "Financial Market Efficiency Tests," NBER Working Papers 4108, National Bureau of Economic Research, Inc.
    15. Jorion, Philippe & Mishkin, Frederic, 1991. "A multicountry comparison of term-structure forecasts at long horizons," Journal of Financial Economics, Elsevier, vol. 29(1), pages 59-80, March.
    16. Verschoor, Willem F. C. & Wolff, Christian C. P., 2001. "Exchange risk premia, expectations formation and "news" in the Mexican peso/U.S. dollar forward exchange rate market," International Review of Financial Analysis, Elsevier, vol. 10(2), pages 157-174.
    17. Font, Begoña, 1998. "Modelización de series temporales financieras. Una recopilación," DES - Documentos de Trabajo. Estadística y Econometría. DS 3664, Universidad Carlos III de Madrid. Departamento de Estadística.
    18. Rossi, Alessandro & Gallo, Giampiero M., 2006. "Volatility estimation via hidden Markov models," Journal of Empirical Finance, Elsevier, vol. 13(2), pages 203-230, March.
    19. Bekaert, Geert, 1996. "The Time Variation of Risk and Return in Foreign Exchange Markets: A General Equilibrium Perspective," The Review of Financial Studies, Society for Financial Studies, vol. 9(2), pages 427-470.
    20. Wooldridge, J.M., 1990. "Regression-Based Inference In Linear Time Series Models With Incomplete Dynamics," Working papers 550, Massachusetts Institute of Technology (MIT), Department of Economics.

    More about this item

    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:syd:wpaper:2123/6735. 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: Vanessa Holcombe (email available below). General contact details of provider: https://edirc.repec.org/data/deusyau.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.