› › Speculative Efficiency Of The Foreign Exchange Market Evaluation Of Forecasting Services


Exchange Rate Forecasting Techniques, Survey Data, and Implications for the Foreign Exchange Market

Author : Jeffrey A. Frankel

Publisher :

Page : 42 pages

File Size : 23,74 MB

Release : 1990

Category : Foreign exchange

ISBN :

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Book Description

The paper presents new empirical results that elucidate the dynamics of the foreign exchange market. The first half of the paper is an updated study of the exchange rate expectations held by market participants, as reflected in responses to surveys, and contains the following conclusions. First, the bias observed in the forward discount as a predictor of the future spot rate is not attributable to an exchange risk premium, as is conventionally believed. Second, at short horizons forecasters tend to extrapolate recent trends, while at long horizons they tend to forecast a reversal. Third, the bias in expectations is robust in the samples, based on eight years of data across five currencies. The second half of the paper abandons the framework in which all market participants share the same forecast, to focus on the importance of heterogeneous expectations. Tests suggest that dispersion of opinion, as reflected in the standard deviation across respondents in the survey, affects the volume of trading in the market, and, in turn, the degree of volatility of the exchange rate. An example of how conflicting forecasts can lead to swings in the exchange rate is the model of "chartists and fundamentalists." The market weights assigned to the two models fluctuate over time in response to recent developments, leading to fluctuations in the demand for foreign currency. The paper ends with one piece of evidence to support the model: the fraction of foreign exchange forecasting services that use "technical analysis" did indeed increase sharply during 1983-85, but declined subsequently









Forecasting Accuracy of Forward Exchange Rates and the Efficiency of the Market for Foreign Exchange

Author : Erdogan Bilik

Publisher :

Page : 213 pages

File Size : 25,21 MB

Release : 1982

Category : Foreign exchange

ISBN :

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Book Description

This dissertation analyses the following three interrelated issues within an efficient market context. 1. Comparative forecasting accuracy of forward exchange-rates vis-a-vis the spot rate predictions marketed by a number of foreign-exchange forecasting services. 2. The existence of "premiums" imbedded in forward exchange-rates. 2. The existence of "premiums" imbedded in forward exchange-rates. 3. Excess profit opportunities in speculative trading strategies on currency futures contracts based on the "trading-signals" marketed by another group of foreign-exchange forecasting services. Track records of twelve future spot exchange-rate forecasting services and four technical exchange rate trend analyzing services are used to compare their predictive performances with that of forward exchange rates and with currency futures contracts. Seven major currencies vis-a-vis the U.S. Dollar are examined during a period of seven years, from 1974 through 1980. The study reveals the following. 1. Foreign-exchange forecasting services in general do not provide more accurate point estimates of the future spot rates than those provided by the forward rates. 2. Both forward rates and forecasts marketed by those services are found to be biased predictors of the future spot rates implying the existence of "premiums" both in forward rates and in those predictions. The premiums are found to be consistently and significantly positive during the study period. This important finding kelps to eliminate ouch of the ambiguity pertaining to the issue of "forward rate bias" in foreign-exchange literature. 3. The statistical analyses used in the study do not provide support for rejecting the notion of inefficiency in the market for foreign-exchange. Although the findings regarding the market efficiency may be due to the inappropriateness of the market model which was jointly tested with the null hypothesis of "efficiency", they may remain valid until either better statistical techniques or more appropriate equilibrium models are developed.









Analyzing the Accuracy of Foreign Exchange Advisory Services

Author : Richard M. Levich

Publisher :

Page : 54 pages

File Size : 23,37 MB

Release : 1979

Category : Foreign exchange

ISBN :

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Book Description

With the introduction of floating exchange rates, the variability of unanticipated exchange rate changes has increased dramatically. A small forecasting industry has developed to provide information about future exchange rates. From an academic viewpoint, it is of interest to examine some of the statistical properties of these forecasts and to relate the forecast errors to other fundamental economic variables in a model with rational behavior. Second, from a more practical viewpoint, we would like to know if foreign exchange forecasts are useful to decision makers. The purpose of this paper is to provide an objective analysis which addresses some of the above questions for a large sample of forecasts. On the basis of the current research, we can draw several conclusions. First, most advisory service forecasts are not as accurate as the forward rate in terms of mean squared error. Second, judgmental forecasters are superior to econometric forecasters for short-term forecasts; the relationship is reversed for longer-term forecasts (one year). Third, two statistical tests indicate that the fraction of "correct" forecasts is significantly larger than what would be expected if the advisory services were only guessing at the direction of the future spot rate. In this sense, the forecast services appear to demonstrate expertise and usefulness. However, a full analysis of the risk-return opportunities available to advisory service users is still incomplete. It should be cautioned that if the forward rate contains a risk premium, then we expect advisory service models to beat the forward rate according to the tests we have outlined. In this case we must measure speculative returns relative to a risk measure. While advisory service forecasts may lead to profits, they may not be unusual after adjusting for risk.