Working Paper: CEPR ID: DP18412
Authors: Lukas Kremens; Ian Martin; Liliana Varela
Abstract: We study exchange rate expectations in surveys of financial professionals and find that they successfully forecast currency appreciation at the two-year horizon, both in and out of sample. Exchange rate expectations are also interpretable, in the sense that three macro-finance variables -the risk-neutral covariance between the exchange rate and equity market, the real exchange rate, and the current account relative to GDP- explain most of their variation. Moreover, there is no "secret sauce" in expectations: after controlling for the three macro-finance variables, the residual information in survey expectations does not forecast currency appreciation in our sample.
Keywords: Quanto Contracts; Expectations
JEL Codes: F31; G15; G17
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Survey Expectations (SCA) (C83) | Realized Currency Appreciation (RCA) (F31) |
| Survey Expectations (SCA) + Interest Rate Differentials (E43) | Realized Currency Appreciation (RCA) (F31) |
| Interest Rate Differentials (E43) | Realized Currency Appreciation (RCA) (F31) |
| Survey Expectations (SCA) + Macro-Financial Variables (QRP, RER, CA/GDP) (E69) | Realized Currency Appreciation (RCA) (F31) |
| Survey Expectations (SCA) (C83) | Residuals (no predictive power for RCA) (C29) |