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Useful Properties of Exchange Rate Forecasts for Risk Management and Derivative Pricing
Author(s) -
Benrud Erik
Publication year - 2001
Publication title -
thunderbird international business review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.553
H-Index - 37
eISSN - 1520-6874
pISSN - 1096-4762
DOI - 10.1002/tie.1007
Subject(s) - economics , volatility (finance) , econometrics , explanatory power , exchange rate , currency , liberian dollar , us dollar , dispersion (optics) , consensus forecast , predictive power , monetary economics , finance , philosophy , physics , optics , epistemology
We examine three useful properties of the yen/dollar exchange‐rate forecasts that are published in January and July in the Wall Street Journal . Those properties are the level of explanatory power, whether some forecasters are consistently better than others, and whether the dispersion of forecasts can predict the volatility of the exchange rates. The results show that the relative accuracy of the individual forecasts has not been random each period, and the evidence suggests that some forecasters are consistently better than others. The forecasts from the best forecasters explain about half of the variability in the semiannual exchange‐rate series. Finally, the dispersion of all the forecasts each period, as measured by the standard deviation, has predictive power with respect to the daily volatility of the forecasts for the three months following the survey. This final property has implications for the pricing and use of currency options. © 2001 John Wiley & Sons, Inc.