Individual Forecasts of Exchange Rates

Abstract

We study the expectations of individual forecasters in the foreign exchange market. The expectations depart from rationality such that survey risk premia are acyclical in contrast to countercyclical rational risk premia. We find that forecasters learn from their own forecast errors (rather than from consensus forecast errors) and that they tend to overreact when forming expectations (as indicated by their forecast revisions). However, we find little support for the sticky and noisy information models that motivate the typical overreaction specification. Finally, while forecasters have worse forecasting performance relative to simple benchmarks, the forecasters who emphasize the real exchange rate and do not overreact have better out-of-sample forecasting performance. Overall, our results highlight the information contained in individual (rather than consensus) exchange rate forecasts.

Keywords: Beliefs, currencies, expectations, foreign exchange rates, predictability