Do foreign exchange forecasters apply asymmetric loss functions? Evidence from three major exchange rates

ABSTRACT

This article investigates which type of loss function is consistent with the hypothesis that major exchange rate forecasts, i.e. the euro, the British pound, and the Japanese yen vis-à-vis the US dollar, are rational. We apply a comprehensive data set, which also allows us to examine different forecast horizons and heterogeneity of forecasters.

KEYWORDS:

• Foreign exchange market
• forecasts
• asymmetric loss
• rationality

JEL CLASSIFICATION:

• F31
• D84
• C33

Acknowledgement

We thank two anonymous referees for helpful and valuable comments. The usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Caunedo et al. (2015) provide an example of the discussion of asymmetric loss functions in inflation forecasts.

² Similarly to this, Christoffersen and Diebold (1997), Patton and Timmermann (2007) and Fritsche et al. (2015) also test for the interdependence of systematic market deviations and loss functions and find mixed results.