Work

Long‐Horizon Exchange Rate Expectations

Year: 2025

Type: article

Abstract: ABSTRACT We study exchange rate expectations in surveys of financial professionals and find that they successfully forecast currency appreciation at the two‐year horizon, both in and out of sample. Exchange rate expectations are also interpretable, in the sense that three macro‐finance variables—the risk‐neutral covariance between the exchange rate and equity market, the real exchange rate, and the current account relative to GDP—explain most of their variation. There is no “secret sauce,” however, in expectations: After controlling for the three macro‐finance variables, the residual information in survey expectations does not forecast currency appreciation in our sample.

Source: The Journal of Finance

DOI: 10.1111/jofi.13504

Authors: LUKAS KREMENS, IAN W. R. MARTIN, LILIANA VARELA

Institutions: University of Washington, Systemic Risk Centre, London School of Economics and Political Science

Language: English

Topic: Financial Markets and Investment Strategies

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

Funders: Government of the United Kingdom, UK Research and Innovation, HORIZON EUROPE Framework Programme, Economic and Social Research Council

Awards: G1844061666, G6041663485