Agreeing on Disagreement: Heterogeneity or Uncertainty?
28 Pages Posted: 26 Aug 2016 Last revised: 3 Aug 2018
Date Written: August 03, 2018
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 US 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: Suggested Citation