An empirical investigation of investor expectations in the currency market |
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Authors: | Austin Murphy |
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Affiliation: | Oakland University, SBA, Rochester, MI 48309-4493, United States |
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Abstract: | Using a new theoretical model of investor expectations in the foreign exchange market, this research finds investor forecasts to be rational. For instance, expectations are not characterized by fat-tailed distributions that might reflect optimistic bubbles and panic. They are also found to rationally predict a correlation between exchange rates and political factors such as modeled “pain” indexes and currency bands. Most importantly, the model detects an ex-ante investor prediction of a small probability of a large currency change that empirically explains ex-post forecasting biases. |
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Keywords: | G-120 G-150 Investor Currency Exchange rates Expectations |
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