Exchange rate forecasts and expected fundamentals

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may AbstractUsing a large panel of individual professionals' forecasts, this paper demonstrates that good exchange rate forecasts are related to a proper understanding of fundamentals, specifically good interest rate forecasts. This relationship is robust to individual fixed effects and further controls. Reassuringly, the relationship is stronger during phases when the impact from fundamentals is more obvious, e.g., when exchange rates substantially deviate from their PPP values. Finally, forecasters largely agree that an interest rate increase relates to a currency appreciation, but only good forecasters get expected interest rates right.

The impact of uncertainty on professional exchange rate forecasts

“…Our findings clearly point to an existing but complex link since a part of exchange rate movements, which is unpredictable by professionals, is directly related to the common unpredictable component of macroeconomic and financial variables. These findings are also in line with recent results provided by Dick et al (2015) who find that the forecast adequacy of fundamentals affects the performance of exchange rate forecasts.…”

“…One implication is that expected fundamentals are potentially more important than current fundamentals (Dick et al, 2015). Adopting their framework for exchange rate expectations provides the following equation for the expected exchange rate E t (s t+1 ) = (1 − b)(f 1,t + u 1,t ) + b(f 2,t + u 2,t ) + bE t (s t+1 ).…”

“…From a theoretical perspective, unexpected exchange rate changes are a result of unexpected news or unexpected changes in fundamentals. Recent findings by Dick et al (2015) also suggest that adequate exchange rate forecasts require an understanding of fundamentals. The degree of uncertainty therefore has a potential impact on both expectations and forecast errors.…”

Standard and optimized carry trades

“…He finds that price purchasing parity is a good predictor of long-term currency returns. As stated in Dick, MacDonald, and Menkhoff (2015), a good prediction of interest rate development leads to a sound forecast for exchange rates, and a strong relationship therefore exists between interest and exchange rate predictions. Given these findings and the Siegel paradox, we use interest rates as a proxy for currency returns.…”

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“…Penelitian terkait teori CIRP kesimpulannya beragam. Terdapat penelitian yang menemukan adanya keterkaitan antara suku bunga dengan pergerakan kurs (Dick, MacDonald dan Menkhoff, 2015). Penelitian lain menemukan keterkaitan tersebut hanya pada negara dengan rating A sedangkan pada negera berkembang keterkaitan hanya terjadi dalam jangka pendek (Skinner dan Mason, 2011).…”