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Original Articles

A microstructural analysis of the exchange rate expectation formation process

Pages 537-539 | Published online: 05 Oct 2010
 

Abstract

In this letter we examine the consistency property of the exchange rate expectation formation process, a precondition to rational expectations and efficient markets. Two major survey data sets over multiple forecast horizons are examined using the recently available null of cointegration test. Experts expectations are consistent (inconsistent) over the short (long) forecast horizon. These results are supported by the current literature and upholds the theory of bandwagon effects in expectation formation. As an aside, this also indirectly supports the concept of long run convergence towards fundamentals determined equilibrium exchange rates, i.e., it supports Dornbusch's overshooting hypothesis.

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