TY - JOUR
T1 - Exchange Risk Premia, Expectations Formation and "News" in the Mexican Peso/US Dollar Forward Exchange Market, special issue on Latin American financial markets
AU - Wolff, C.C.P.
AU - Verschoor, W.F.C.
PY - 2001/1/1
Y1 - 2001/1/1
N2 - In this article, we investigate expectations concerning the mexican peso/us dollar exchange rate with the aid of a survey dataset containing market participants' forecasts of the exchange rate and of the interest differential between the peso and the dollar. Our findings indicate that the survey expectations were off by a large and significant constant. At the same time, large average risk premia, as well as time variance in the risk premia, were detected. As to the expectations formation mechanism, market participants tended to react to current (unanticipated) depreciations by expecting future depreciations at the 3-, 6-, and 12-month horizons, as implied by destabilizing expectations models. “news” about the interest differential did not contribute additional predictive power with regard to the peso/dollar exchange rate once a risk premium term is included in a regression equation. Interestingly, a dornbusch-type overshooting effect is present in the mexican data.
AB - In this article, we investigate expectations concerning the mexican peso/us dollar exchange rate with the aid of a survey dataset containing market participants' forecasts of the exchange rate and of the interest differential between the peso and the dollar. Our findings indicate that the survey expectations were off by a large and significant constant. At the same time, large average risk premia, as well as time variance in the risk premia, were detected. As to the expectations formation mechanism, market participants tended to react to current (unanticipated) depreciations by expecting future depreciations at the 3-, 6-, and 12-month horizons, as implied by destabilizing expectations models. “news” about the interest differential did not contribute additional predictive power with regard to the peso/dollar exchange rate once a risk premium term is included in a regression equation. Interestingly, a dornbusch-type overshooting effect is present in the mexican data.
U2 - 10.1016/S1057-5219(01)00044-8
DO - 10.1016/S1057-5219(01)00044-8
M3 - Article
SN - 1057-5219
VL - 10
SP - 157
EP - 174
JO - International Review of Financial Analysis
JF - International Review of Financial Analysis
ER -