Agreeing on Disagreement: Heterogeneity or Uncertainty?

34 Pages Posted: 24 Feb 2016 Last revised: 21 Feb 2019

See all articles by Saskia ter Ellen

Saskia ter Ellen

Norges Bank

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: February 2019

Abstract

We study whether disagreement is a useful proxy for uncertainty in the foreign exchange market using monthly forecasts for the euro, British pound, and Japanese yen against the U.S. dollar over the 2001 - 2017 period. We obtain measures of uncertainty and find that disagreement is not robustly related to uncertainty, as results depend heavily on the forecast horizon. In addition, we find that disagreement is positively associated with market liquidity and trading activity. This confirms that disagreement is not a proper proxy for uncertainty and suggests that it is more akin to heterogeneity.

Keywords: foreign exchange markets, disagreement, heterogeneous expectations, uncertainty

JEL Classification: G12, G15

Suggested Citation

ter Ellen, Saskia and Verschoor, Willem F. C. and Zwinkels, Remco C.J., Agreeing on Disagreement: Heterogeneity or Uncertainty? (February 2019). Journal of Financial Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2736865

Saskia Ter Ellen (Contact Author)

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Remco C.J. Zwinkels

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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