The Scapegoat Theory of Exchange Rates: The First Tests

59 Pages Posted: 15 Jan 2012 Last revised: 7 May 2014

See all articles by Marcel Fratzscher

Marcel Fratzscher

DIW Berlin; Centre for Economic Policy Research (CEPR)

Dagfinn Rime

BI Norwegian Business School

Lucio Sarno

City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)

Gabriele Zinna

Bank of Italy

Multiple version iconThere are 5 versions of this paper

Date Written: May 7, 2014

Abstract

This paper provides an empirical test of the scapegoat theory of exchange rates (Bacchetta and van Wincoop 2004, 2013). This theory suggests that market participants may attach excessive weight to individual economic fundamentals, which are picked as "scapegoats" to rationalize observed currency fluctuations at times when exchange rates are driven by unobservable shocks. Using novel survey data that directly measure foreign exchange scapegoats for 12 exchange rates, coupled with data on currency transactions, we find empirical evidence that strongly supports the scapegoat theory. The resulting models explain a large fraction of the variation and directional changes in exchange rates.

Keywords: scapegoat, exchange rates, economic fundamentals, survey data, order flow

JEL Classification: F31, G10

Suggested Citation

Fratzscher, Marcel and Rime, Dagfinn and Sarno, Lucio and Zinna, Gabriele, The Scapegoat Theory of Exchange Rates: The First Tests (May 7, 2014). Available at SSRN: https://ssrn.com/abstract=1985169 or http://dx.doi.org/10.2139/ssrn.1985169

Marcel Fratzscher (Contact Author)

DIW Berlin ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Dagfinn Rime

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway
+47-46410507 (Phone)

HOME PAGE: http://home.bi.no/dagfinn.rime/

Lucio Sarno

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Gabriele Zinna

Bank of Italy ( email )

Via Nazionale 91
00184 Roma
Italy

HOME PAGE: http://gabrielezinna.github.io/

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