Great expectations? evidence from Colombia’s exchange rate survey

Juan Jose Echavarria, Mauricio Villamizar-Villegas

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

© 2016, The Author(s).In this paper, we use the largest exchange rate survey in Colombia to test for the rational expectations hypothesis, the presence of a time-varying risk premium and the accuracy of exchange rate forecasts. Our findings indicate that episodes of exchange rate appreciation preceded expectations of further appreciation in the short run, but were marked by depreciations in the long run. This reversal largely explains the stabilizing pattern of expectations. Additionally, we find that the forward discount differed from future exchange rate changes due to the rejection of the unbiasedness condition and to the presence of a time-varying risk premium. Finally, we find that only short run expectations were able to outperform a random walk process as well as models of extrapolative, adaptive, and regressive expectations. Long-run expectations, on the other hand, behaved poorly in terms of forecasting accuracy.
Original languageEnglish (US)
Pages (from-to)1-27
Number of pages27
JournalLatin American Economic Review
Volume25
Issue number1
DOIs
StatePublished - Jul 1 2016

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Exchange rates
Colombia
Short-run
Time-varying risk premium
Expectations hypothesis
Random walk
Rational expectations
Unbiasedness
Forecasting accuracy
Discount
Depreciation
Reversal

Cite this

Echavarria, Juan Jose ; Villamizar-Villegas, Mauricio. / Great expectations? evidence from Colombia’s exchange rate survey. In: Latin American Economic Review. 2016 ; Vol. 25, No. 1. pp. 1-27.
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Great expectations? evidence from Colombia’s exchange rate survey. / Echavarria, Juan Jose; Villamizar-Villegas, Mauricio.

In: Latin American Economic Review, Vol. 25, No. 1, 01.07.2016, p. 1-27.

Research output: Contribution to journalArticle

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