Exchange Rate Expectations
Type
working paper
Date Issued
2026-04-10
Author(s)
Abstract
Based on a large panel of professional forecasters, we establish five facts about exchange rate expectations. First, they are unbiased. Second, they deviate from the random walk prediction-more so for longer forecast horizons. Third, they imply larger forecast errors than the random walk model. Fourth, expected (actual) depreciation co-moves positively (negatively) with the forward premium. Fifth, at the individual forecaster level, forecast revisions overreact to news. We interpret these findings through a macroeconomic model in which exchange rate movements are driven by fundamentals. The model explains the first two facts under rational expectations, and all five under diagnostic expectations.
Keywords
Exchange rates
Survey data
Fama puzzle
Overreaction
Random walk
Rational expectations
Diagnostic expectations F31
F41
D84
HSG Classification
contribution to scientific community
Refereed
No
Subject(s)