Showing papers on "Forward exchange rate published in 1985"

Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations

Abstract: Survey data provide a measure of exchange rate expectations that is superior to the commonly-used forward exchange rate in the respect that it does notinclude a risk premium. We use survey data and the technique of bootstrapping to test a number of propositions of interest. We are able to reject static or "randomwalk" expectations for both nominal and real exchange rates. Expected depreciation is large in magnitude. There is even statistically significant unconditional bias: during the 1981-85 "strong dollar period" the market persistently over estimated depreciation of the dollar. Expected depreciation is also variable, contrary to some recent claims. The expected future spot rate can be viewed as inelastic with respect to the contemporaneous spot rate, in that it also puts weight on other variables: the lagged expected spot rate (as in adaptive expectations), the lagged actual spot rate (distributed lag expectations), or a long-run equilibrium rate (regressive expectations). In one irnportant case, the relatively low weight that investors' expectations put on the contemporaneous spot rate constitutes a statistical rejection of rational expectations: we find that prediction errors are correlated with expected depreciation, so that investors would do better if they always reduced fractionally the magnitude of expected depreciation. This is the same result found by Bilson, Fama, and many others, except that it can no longer be attributed to a risk premium.

Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations

Abstract: Survey data provide a measure of exchange rate expectations superior to the forward rate in that no risk premium interferes. We estimate extrapolative, adaptive, and regressive models of expectations. Static or "random walk" expectations and bandwagon expectations are rejected: current appreciation generates the expectation of future depreciation because variables other than the contemporaneous spot rate receive weight. In comparing expectations to the process governing the spot rate, we find statistically significant bias. No variable is as ubiquitous in international financial theory and yet as elusive empirically as investors' expectations regarding exchange rates. In the past, expectations have been modeled in an ad hoc way, often by using the forward exchange rate. There is, however, a serious problem with using the forward discount as the measure of the expected change in the exchange rate, in that the two may not be equal. The gap that may separate the forward discount and expected depreciation is generally interpreted as a risk premium. Most of the large empirical literature testing the unbiasedness of the forward exchange rate, for example, has found it necessary either arbitrarily to assume away the existence of the risk premium, if the aim