The Predictive Power of Survey-Based Exchange Rate Forecasts: Is there a Role for Dispersion?

The Predictive Power of Survey-Based Exchange Rate Forecasts: Is there a Role for Dispersion?

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Article ID: iaor201526527
Volume: 34
Issue: 5
Start Page Number: 337
End Page Number: 353
Publication Date: Aug 2015
Journal: Journal of Forecasting
Authors: ,
Keywords: dispersion, survey
Abstract:

Previous research has shown that the consensus of individual exchange rate forecasts performs no better than many commonly used forecasting models in predicting future exchange rates. Studies on equity and bond markets have explored the effects of dispersion in forecasts on the predictive power of forecasts; however, no earlier paper has investigated such effects in the context of the foreign exchange market. This study explores the role of consensus forecast dispersion as a factor leading to bias and anchoring in exchange rate forecasts. Our analysis of five currency pairs reveals that consensus forecasts mostly appear to be unbiased predictors of exchange rates in the long run, but most are unable to pass tests for short‐run unbiasedness. In three of the five currencies examined it appears that forecasters should take greater account of reported forecast dispersion.

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