Are Foreign Excess Returns Always Predictable? Expectations Errors Revisited

40 Pages Posted: 13 Mar 2010

See all articles by Carlos Velasco

Carlos Velasco

Universidad Carlos III de Madrid - Department of Economics

Seongman Moon

Universidad Carlos III de Madrid - Department of Economics

Date Written: February 1, 2010

Abstract

Using USD bilateral exchange rates in 1975-2009, we find that the strong predictability of foreign excess returns documented in the literature is mainly driven by a particular sample period. We first show that both the statistically significant positive serial dependence of excess returns in the entire sample and the very weak (mostly insignificant) positive serial dependence in the subsample excluding observations in 1980-87 are consistent with the prediction of the expectations errors alternative. We link this with the change in forecasting techniques over time and provide evidence that the behavior of the survey expectation is compatible with the market expectation.

Suggested Citation

Velasco, Carlos and Moon, Seongman, Are Foreign Excess Returns Always Predictable? Expectations Errors Revisited (February 1, 2010). Available at SSRN: https://ssrn.com/abstract=1569489 or http://dx.doi.org/10.2139/ssrn.1569489

Carlos Velasco

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain
+34-91 6249646 (Phone)
+34-91 6249875 (Fax)

Seongman Moon (Contact Author)

Universidad Carlos III de Madrid - Department of Economics ( email )

Calle Madrid 126
Getafe, 28903
Spain

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