Expectation Errors in the Foreign Exchange Market

37 Pages Posted: 22 Dec 2016

See all articles by Alex Luiz Ferreira

Alex Luiz Ferreira

University of São Paulo

Michael Moore

University of Warwick - Warwick Business School

Satrajit Mukherjee

Ghent University - Department of Financial Economics

Date Written: December 21, 2016

Abstract

This paper argues that order flow can explain exchange rate forecasting errors. A unified theoretical model is developed showing that forecasting errors can be explained by both informational rigidities and portfolio shifts. This is applied to Brazilian data using a unique data set of daily consensus exchange rate forecasts managed by the Banco Central do Brasil along with order flow derived from the FX futures market. The results strongly support the theory.

Keywords: Expectation Errors, Noisy Information, Microstructure, Order Flow, Exchange Rates

JEL Classification: F31, F37, G14, D82

Suggested Citation

Ferreira, Alex Luiz and Moore, Michael John and Mukherjee, Satrajit, Expectation Errors in the Foreign Exchange Market (December 21, 2016). Available at SSRN: https://ssrn.com/abstract=2888547 or http://dx.doi.org/10.2139/ssrn.2888547

Alex Luiz Ferreira

University of São Paulo ( email )

Av. Bandeirantes 3900 - Monte Alegre
Ribeião Preto, 14040-900
Brazil

Michael John Moore (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Satrajit Mukherjee

Ghent University - Department of Financial Economics ( email )

Sint-Pietersplein 5
Ghent, East Flanders B9000
Belgium

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