Are outcomes driving expectations or the other way around? An I(2) CVAR analysis of interest rate expectations in the dollar/pound market

Jusélius, Katarina; Stillwagon, Josh

doi:10.1016/j.jimonfin.2018.02.003

Cited by 21 publications

(26 citation statements)

References 41 publications

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“…This supports the imperfect knowledge hypothesis that in the medium run the nominal exchange rate tends to move away from its long-run equilibrium values, while in the long run it moves back towards equilibrium. 17 A similar relationship was found in Juselius and Assenmacher (2017) for Swiss-US data and in Juselius and Stillwagon (2017) for UK-US data, both for a more recent period. 18 The latter result is also found in Juselius and Stillwagon (2017).…”

Section: Testable Hypotheses On Integration and Cointegrationsupporting

confidence: 57%

“…17 A similar relationship was found in Juselius and Assenmacher (2017) for Swiss-US data and in Juselius and Stillwagon (2017) for UK-US data, both for a more recent period. 18 The latter result is also found in Juselius and Stillwagon (2017). 19 Similar results were found in Juselius and Assenmacher (2017) and in Juselius and Stillwagon (2017).…”

Section: Testable Hypotheses On Integration and Cointegrationsupporting

confidence: 57%

“…18 The latter result is also found in Juselius and Stillwagon (2017). 19 Similar results were found in Juselius and Assenmacher (2017) and in Juselius and Stillwagon (2017). Coefficients with a |t − value| < 1.3 is replaced with an *.…”

Section: Testable Hypotheses On Integration and Cointegrationmentioning

confidence: 57%

“…This conclusion is strengthened by very similar results based on Danish-German data (Juselius 2006, chp. 21), on Swiss-US data (Juselius and Assenmacher 2017) and on UK-US data (Juselius and Stillwagon 2017). Because of this, it seems that the key for understanding these long swings in exchange rates and interest rates (both real and nominal) is to recognize the importance of imperfect knowledge, reflexivity, and positive and negative feedback mechanisms (Soros 1987;Frydman and Goldberg 2013;Hands 2013;Hommes 2013).…”

Section: Discussionmentioning

confidence: 99%

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Using a Theory-Consistent CVAR Scenario to Test an Exchange Rate Model Based on Imperfect Knowledge

Jusélius

2017

Econometrics

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A theory-consistent CVAR scenario describes a set of testable regularieties one should expect to see in the data if the basic assumptions of the theoretical model are empirically valid. Using this method, the paper demonstrates that all basic assumptions about the shock structure and steady-state behavior of an an imperfect knowledge based model for exchange rate determination can be formulated as testable hypotheses on common stochastic trends and cointegration. This model obtaines remarkable support for almost every testable hypothesis and is able to adequately account for the long persistent swings in the real exchange rate.

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Section: Testable Hypotheses On Integration and Cointegrationsupporting

confidence: 57%

Section: Testable Hypotheses On Integration and Cointegrationsupporting

confidence: 57%

Section: Testable Hypotheses On Integration and Cointegrationmentioning

confidence: 57%

Section: Discussionmentioning

confidence: 99%

See 2 more Smart Citations

Using a Theory-Consistent CVAR Scenario to Test an Exchange Rate Model Based on Imperfect Knowledge

Jusélius

2017

Econometrics

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“…5 See Dominguez (1986), MacDonald and Torrance (1988), Froot and Frankel (1989), Cavaglia, Verschoor, and Wolff (1993), Frankel and Chinn (1993), Frankel and Froot (1987), Bacchetta, Mertens, and van Wincoop (2009), and Stillwagon (2014). Further, the CVAR captures "long-run" relationships whereas Juselius and Assenmacher (2017) and Juselius and Stillwagon (2017) find extrapolation to be more of a "medium-run" phenomenon. See Appendix for a complete listing of institutions and for details on the timing correction.…”

Section: Endnotesmentioning

confidence: 99%

Currency risk premia: Perceptions of downside risk and deviations from benchmark values

Furnagiev

Stillwagon

2018

Int. J Fin Econ

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This paper examines the empirical performance of an alternative model of the currency risk premium. This model relates risk not to the variance of returns but rather to potential crash risk based on the deviation, or “gap,” between the exchange rate and perceptions of its benchmark value. The model is tested using a novel data set of traders' exchange rate forecasts, from 1986:08 to 2013:09. The forecast data eliminate the need for a joint hypothesis about expectations formation through direct measurement of the market's ex ante premium. To measure the benchmark value, rather than use purchasing power parity, we relate it to recent levels through a moving average. Strong support is found for the prediction that the premium comoves positively with the “gap” measure of risk, according to cointegrated vector autoregression analyses for all four markets examined. This result is robust for moving averages from six to 24 months and when controlling for exchange rate volatility. The findings suggest how investors assess downside risk ex ante, at least in part, and may rationalize the application of certain technical analysis.

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Markov switching in exchange rate models: will more regimes help?

Stillwagon

Sullivan

2019

Empir Econ

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This paper examines the performance of Markov switching models (MSM) of the exchange rate using a data driven approach to determine the number of regimes. The analysis is conducted for the British pound/USD over the last thirty years with alternative specifications from the literature. A noteworthy finding is that there is a close correspondence among the number of regimes that minimizes mean square forecast errors, the number of regimes selected by traditional information criteria (but not Markov switching specific information criteria), and the fewest regimes with well-behaved residuals. Although allowing for more regimes yields improvement over single or two regime models, the MSM is still unable to outperform a random walk.

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Are outcomes driving expectations or the other way around? An I(2) CVAR analysis of interest rate expectations in the dollar/pound market

Cited by 21 publications

References 41 publications

Using a Theory-Consistent CVAR Scenario to Test an Exchange Rate Model Based on Imperfect Knowledge

Using a Theory-Consistent CVAR Scenario to Test an Exchange Rate Model Based on Imperfect Knowledge

Currency risk premia: Perceptions of downside risk and deviations from benchmark values

Markov switching in exchange rate models: will more regimes help?

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