NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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

Jeffrey A. Frankel, Kenneth A. Froot

NBER Working Paper No. 1672 (Also Reprint No. r0854)
Issued in July 1985
NBER Program(s):   ITI   IFM

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.

download in pdf format
   (688 K)

email paper

This paper is available as PDF (688 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w1672

Published:

  • Frankel, Jeffrey A. and Kenneth A. Froot. "Using Standard Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, Vol. 77, No. 1, (March 1987), pp. 133-153. ,
  • Reprinted in On Exchange Rates, J. Frankel, MIT Press, Cambridge, 1993

Users who downloaded this paper also downloaded these:
Ito w2679 Foreign Exchange Rate Expectations: Micro Survey Data
Frankel and Froot w3470 Exchange Rate Forecasting Techniques, Survey Data, and Implications for the Foreign Exchange Market
Frankel and Froot w2216 Short-term and Long-Term Expectations of the Yen/Dollar Exchange Rate: Evidence from Survey Data
Frankel and Chinn w3806 Exchange Rate Expectations and the Risk Premium: Tests For a Cross- Section of 17 Currencies
Obstfeld and Rogoff w4693 Exchange Rate Dynamics Redux
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us