Exchange Rate Forecasting Techniques, Survey Data, and Implications for the Foreign Exchange Market
29 Pages Posted: 23 Apr 2004 Last revised: 26 Dec 2022
There are 2 versions of this paper
Exchange Rate Forecasting Techniques, Survey Data, and Implications for the Foreign Exchange Market
Date Written: October 1990
Abstract
The paper presents new empirical results that elucidate the dynamics of the foreign exchange market. The first half of the paper is an updated study of the exchange rate expectations held by market participants, as reflected in responses to surveys, and contains the following conclusions. First, the bias observed in the forward discount as a predictor of the future spot rate is not attributable to an exchange risk premium, as is conventionally believed. Second, at short horizons forecasters tend to extrapolate recent trends, while at long horizons they tend to forecast a reversal. Third, the bias in expectations is robust in the samples, based on eight years of data across five currencies. The second half of the paper abandons the framework in which all market participants share the same forecast, to focus on the importance of heterogeneous expectations. Tests suggest that dispersion of opinion, as reflected in the standard deviation across respondents in the survey, affects the volume of trading in the market, and, in turn, the degree of volatility of the exchange rate. An example of how conflicting forecasts can lead to swings in the exchange rate is the model of "chartists and fundamentalists." The market weights assigned to the two models fluctuate over time in response to recent developments, leading to fluctuations in the demand for foreign currency. The paper ends with one piece of evidence to support the model: the fraction of foreign exchange forecasting services that use "technical analysis" did indeed increase sharply during 1983-85, but declined subsequently.
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Understanding the U.S. Dollar in the Eighties: The Expectations of Chartists and Fundamentalists
By Jeffrey A. Frankel and Kenneth Froot
-
Short-Term and Long-Term Expectations of the Yen/Dollar Exchange Rate: Evidence from Survey Data
By Jeffrey A. Frankel and Kenneth Froot
-
On the Consistency of Short-Run and Long-Run Exchange Rate Expectations
By Kenneth Froot and Takatoshi Ito
-
Exchange Rate Forecasting Techniques, Survey Data, and Implications for the Foreign Exchange Market
By Jeffrey A. Frankel and Kenneth Froot
-
Interpreting Tests of Forward Discount Bias Using Survey Data on Exchange Rate Expectations
By Kenneth Froot and Jeffrey A. Frankel
-
By Danny Quah and Takatoshi Ito
-
Peso Problems, Bubbles, and Risk in the Empirical Assessment of Exchange-Rate Behavior
-
On Time-Series Properties of Time-Varying Risk Premium in the Yen/Dollar Exchange Market
By Fabio Canova and Takatoshi Ito