Working Paper: NBER ID: w2679
Authors: Takatoshi Ito
Abstract: This paper analyzes the panel data of bi-weekly surveys, conducted by the Japan Center for International Finance, on the yen/dollar exchange rate expectations of forty-four institutions for two years. There are three major findings in this paper. First, market participants are found to be heterogeneous. There are significant "individual effects" in their expectation formation. Second, many institutions are found to violate the rational expectation hypothesis. Third, forecasts with long horizons showed less yen appreciation than those with short horizons. Cross-equation constraints implied by the consistencyof the forecast term structure are strongly rejected in the data.
Keywords: Foreign Exchange; Expectations; Survey Data
JEL Codes: F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market participants' expectations (D84) | actual exchange rate movements (F31) |
| individual biases (D91) | accuracy of predictions (C52) |
| individual effects in forecasts (C53) | heterogeneity in expectation formation (D84) |
| systematic errors in forecasts (C53) | violation of the rational expectation hypothesis (D84) |
| long horizon forecasts (Q47) | less yen appreciation (F31) |
| short horizon forecasts (G17) | more yen appreciation (F31) |
| cross-equation constraints (C30) | consistency of forecast term structures (E47) |
| individual forecasts (C53) | variation in predictions (C29) |