complex dynamics in a cobweb model with adaptive production adjustment abstract chaos occurs in a nonlinear cobweb model with normal demand and supply naive expectations and adaptive production adjustment the model differs from existing ones in that it includes adaptive production adjustment instead of adaptive expectations the model exhibits observable chaos strange attractors as well as topological chaos horseshoes associated with homoclinic points as numerical simulations show the faster suppliers adjust their production and the more inelastic demand is the more likely the market behaves chaotically

predictability in financial markets what do survey expectations tell us abstract there is widespread evidence of excess return predictability in financial markets for the foreign exchange market a number of studies have documented that the predictability of excess returns is closely related to the predictability of expectational errors of excess returns in this paper we investigate the link between the predictability of excess returns and expectational errors in a much broader set of financial markets using data on survey expectations of market participants in the stock market the foreign exchange market the bond market and money markets in various countries the results are striking first in markets where there is significant excess return predictability expectational errors of excess returns are predictable as well with the same sign and often even with similar magnitude this is the case for foreign exchange stock and bond markets second in the only market where excess returns are generally not predictable the money market expectational errors are not predictable either these findings suggest that an explanation for the predictability of excess returns must be closely linked to an explanation for the predictability of expectational errors

expectation formation mechanisms profitability of foreign exchange trading and exchange rate volatility an attempt is made to identify the expectation formation mechanism dominating the foreign exchange market and to demonstrate that exchange rate volatility can be attributed to the heterogeneity of traders with respect to expectation formation the criterion used to identify the dominance of a particular mechanism is the profitability of trading based on that mechanism it is concluded that mixed and extrapolative expectations are the dominant mechanisms that market participants follow some sort of a herd behaviour and that they pay attention to the expectations of other participants it is also found that the heterogeneity of market participants with respect to expectation formation goes a long way towards explaining volatility

nonlinear expectations in speculative markets evidence from the ecb survey of professional forecasters chartist and fundamentalist models have proven to be capable of replicating stylized facts on speculative markets in general this is achieved by specifying nonlinear interactions of otherwise linear asset price expectations of the respective trader groups this paper investigates whether or not regressive and extrapolative expectations themselves exhibit significant nonlinear dynamics the empirical results are based on a new data set from the european central bank survey of professional forecasters on oil price expectations in particular we find that forecasters form destabilizing expectations in the neighborhood of the fundamental value whereas expectations tend to be stabilizing in the presence of substantial oil price misalignment

how large are the impacts of carbon motivated border tax adjustments on china and how to mitigate them shandong social science planning fund program 12djjj12 independent innovation foundation of shandong university iifsdu 2012gn038 ministry of education research of social sciences youth funded projects 13yjc790065 national natural science foundation of china 71203186 71173170 china postdoctoral science foundation 2013m530309 2012t50802

imperfect knowledge and behaviour in the foreign exchange market this paper explores the consequences of imperfect knowledge for exchange rate dynamics within the monetary class of models the authors framework which they call the theories consistent expectations framework provides a particular formalization of a world in which agents use theories in order to look forward but in which these theories provide only qualitative knowledge rather than quantitative knowledge about the economy the authors find that as long as agents possess at least some degree of imperfect knowledge the monetary models of the exchange rate generate dynamics consistent with the behavior observed in the literature copyright 1996 by royal economic society

a portrait of the individual investor abstract behavioral finance models often rely on a concept of noise traders who are prone to judgment and decision making errors what do noise traders do we review prior research and present new survey evidence on the behavior of small individual investors who manage their own equity portfolios many people 1 discover naive patterns in past price movements 2 share popular models of value 3 are not properly diversified and 4 trade in suboptimal ways

the time series properties of the risk premium in the yen dollar exchange market summary in this paper a var model is employed to construct a measure of the conditional expectations of the future yen dollar spot rate this measure allows us to examine the dynamics of an ex ante time series for the risk premium in the market the var model produces better forecasts than the survey responses for turbulent periods such as 1981 1982 and 1984 1985 the var generated expectations are then used to construct a risk premium time series this risk premium ieerie series seems to be more reliable than the ones obtained using either survey data on expectations of the future spot exchange rate or the ex post realized spot exchange rate tests on the risk premium series suggest that a risk premium was present but that it was virtually constant throughout the sample the conditional variance of the risk premium changed over time but its unconditional distribution seemed stable across subsamples despite these features the volatility of the series was substantial and varied considerably throughout the sample

nonseparable utility and the double dividend debate reconsidering the tax interaction effect the literature on the use of environmental taxes inthe presence of distortionary labor taxes warns thata partial equilibrium pigouvian tax analysis is notappropriate because increasing the price of dirtygoods can futher aggravate the prexisting distortions this argument is most frequently made assuming thatlabor is taxed to meet a fixed revenue requirement when a dirty good is also taxed others argue thatthis lowers workers real wages causing people toreduce their labor supply below its already suboptimallevel aggravating labor market distortions however most papers ignore the effect that a cleanerenvironment can have on labor supply that is mostpast work has assumed that the quality of theenvironment is weakly separable in the utilityfunction we argue that a cleaner environment canincrease labor supply at least partially offsettingany incentive for workers to decrease their laborsupply further we show explicitly how relaxing theseparability assumption affects the standardresults

inefficiency of foreign exchange markets and expectations survey evidence in recent years the finding of a bias has cast doubts on the efficiency of the forward exchange market a large survey of exchange rate expectations in the danish market shows that this inefficiency is mainly due to risk aversion in the market the results contradict the findings of surveys of us and uk forward exchange markets where contribution from biased expectations has been large

do dollar forecasters believe too much in ppp this article extends earlier studies on exchange rate expectations formation by using new data and adding information about forecasters reliance on fundamental analysis for the first time we replicate the conventional result of nonrational expectations moreover biases in expectations are identified as professionals significantly believe too much in mean reversion mean being represented by purchasing power parity ppp when respondents are grouped on their reliance to fundamental analysis fundamentalists reveal an even stronger bias those who rely the least on fundamentals preferring technical analysis instead show a significantly smaller bias towards ppp in lieu of expecting too much trend extrapolation biased beliefs will grow stronger when the us dollar is further away from ppp finally the accuracy of the expectations is poor for both groups however we find directional forecasting ability

on empirical exchange rate models what does a rejection of the symmetry restriction on short run interest rates mean abstract the purpose of this paper is to interpret the well documented rejection of reduced form symmetry restrictions on short run interest rates and to show that such a rejection implies a rejection of rational expectations re and or uncovered interest rate parity uip the paper also shows that if this rejection is due to failure of uip it cannot be explained by the presence of a standard risk premium in order to provide for well specified alternatives the paper explores the reduced form implications of imperfect capital mobility and a recent alternative to re called the theories consistent expectations framework

macroeconomic expectations and time varying heterogeneity evidence from individual survey data the goal of this paper is to investigate forecast heterogeneity and time variability in the formation of expectations using disaggregated monthly survey data on macroeconomic indicators provided by

further evidence on exchange rate expectations abstract this paper considers a previously unexploited survey data set of exchange rate expectations which allows us to focus on differences between ems and dollar exchange rates we corroborate the earlier finding in the literature that exchange rate forecasts are not rational and that agents do not use all available information efficiently although extrapolative and adaptive expectations formation mechanisms describe non ems exchange rate expectations to a certain extent ems exchange rates forecasts seem to follow long run fundamentals more closely and would suggest that agents believe that ems exchange rate expectations undershoot their long run equilibrium values jel f31

why are there large differences in performances when the same carbon emission reductions are achieved in different countries great interest has been in unilateral climate policies given present difficulty of establishing stable global coordinated agreements in this paper we investigate underlining factors explaining large differences in performances when the same carbon emission reductions are achieved in different abating countries to this end we develop a new multi country general equilibrium model incorporating six countries or world regions two goods six production inputs capital mobility energy mobility and international trade meanwhile we adopt two performance indicators with carbon leakage representing environmental efficiency and carbon emission abatement costs revealing cost effectiveness our findings are as follows firstly there are large differences in performances among these unilateral climate policies as evidenced by large differences in leakage rates and carbon emission abatement costs secondly the new global climate treaties to replace the kyoto protocol should be able to induce more carbon emission reductions in countries with low carbon emission reduction costs since such setting contributes to global cost savings finally developed countries have high carbon emission abatement costs compared with large developing countries china and india in this paper implying that there should be trade off mechanisms between efficiency and equity regarding how to allocate carbon emission reductions among countries

sharing responsibility for carbon dioxide emissions a perspective on border tax adjustments concerns about the equity and efficiency of current allocation principles related to responsibility for carbon dioxide co2 emissions have been presented in the recent literature the objective of this paper is to design a calculation framework for shared responsibility from the perspective of border tax adjustments the advantage of this framework is that it makes the shared responsibility principle and border carbon taxation complementary to each other these are important policies for reducing global co2 emissions but they are individually supported by developing and developed countries as an illustration the proposed framework is applied to data from china in 2007 the empirical results show that for the chinese economy as a whole changing from the production based criterion to the shared responsibility approach would lead to an 11 decrease in its responsibility for co2 emissions moreover the differences observed between the production based criterion and the shared responsibility approach are considerable in several sectors for example changing from the production based criterion to the shared principle would lead to a 60 decrease in the responsibility of the textile sector

explaining dispersion in foreign exchange expectations a heterogeneous agent approach this paper combines survey forecasts with a heterogeneous agent model to examine the dispersion of expectations of participants in the foreign exchange market we find distinct variations in the level of dispersion and document that dispersion arises because of the combined effect of market participants holding private information and attaching different weights to fundamental technical and carry trade analyses we estimate a heterogeneous agent model on the survey forecasts and show that the weight attached to the three forecast rules is adjusted over time in response to the relative importance of the rules in the actual foreign exchange market the weights are related to market circumstances the switching model is finally shown to outperform the random walk model in an out of sample forecast exercise

distributional effects of a carbon tax on chinese households a case of shanghai abstract as an effective policy instrument to reduce co 2 emissions the effects of a carbon tax on distribution have been the critical factor in determining whether a carbon tax will be acceptable in china taking shanghai as an example which is the economic center and front runner of china this paper estimates the distributional effect of a carbon tax on households in various income groups by using the input output model and the suits index the results indicate that the comprehensive distributional effect of the carbon tax is regressive the expenditure of the low income group caused by the carbon tax accounts for 0 853 of the total expenditure while that of the high income group 0 712 the direct distributional effect presents a weak progressivity while the indirect one is significantly regressive and the latter is much larger than the former moreover the suits index of the carbon tax is 0 078 implying that the carbon tax burden on the low income group is the highest and thus that a carbon tax can intensify income inequality therefore when introducing a carbon tax some rational associated redistribution or compensation measures such as purposive transfer payments should be implemented to restrict or even eliminate the regressivity of the carbon tax

efficiency in decentralized oligopolistic markets the paper analyzes quantity competition in economies in which a network describes the set of feasible trades a model is presented in which the identity of buyers of sellers and of intermediaries is endogenously determined by the trade flows in the economy the analysis first considers small economies and provides sufficient conditions for equilibrium existence a characterization of prices and flows and some negative results relating welfare to network structure the second and central part of the analysis considers behavior in large markets and presents necessary and sufficient conditions on the network structure for equilibria to be approximately efficient when the number of players is large

the effects of japanese interventions on fx forecast heterogeneity we investigate the determinants of forecast heterogeneity in the jpy usd market using panel data from consensus economics we find that past exchange rate volatility increases forecast dispersion while foreign exchange intervention of the japanese ministry of finance dampens expectation heterogeneity

strategic behavior of federal open market committee board members evidence from members forecasts abstract in this paper we use panel data to test whether federal open market committee fomc board members forecasts are rational rationality is rejected in the sense that forecasts by members are heavily dependent on previous own forecasts and last consensus made in fomc furthermore we reveal the strategic behavior of fomc board members forecasts by governors who always have voting rights agree much with the previous consensus of fomc members forecasts in contrast non governors who rotate voting rights exaggerate their forecasts they aggressively deviate their forecasts from previous consensus the former is herding behavior and the latter is anti herding behavior our results imply that individual members behave strategically governors want to present policy consistent forecasts to the congress and non governors utilize their forecasts to influence decision making in fomc

carry trades order flow and the forward bias puzzle we investigate the relation between foreign exchange fx order flow and the forward bias we outline a decomposition of the forward bias according to which a negative correlation between interest rate differentials and order flow creates a time varying risk premium consistent with that bias using 10 years of data on fx order flow we find that more than half of the forward bias is accounted for by order flow with the rest being explained by expectational errors we also find that carry trading increases currency crash risk in that order flow generates negative skewness in fx returns

differences in beliefs and currency risk premiums this paper studies the importance of heterogeneous beliefs for the dynamics of asset prices we focus on currency markets where the absence of short selling constraints allows us to perform sharper tests of theoretical predictions using a unique data set with detailed information on foreign exchange forecasts we construct an empirical proxy for differences in beliefs we show that this proxy has a strong effect on the implied volatility of currency options beyond the volatility of macroeconomic fundamentals we document that differences in beliefs impact also on the shape of the implied volatility smile on the volatility risk premiums and on future currency returns

behavioral heterogeneity in u s inflation dynamics in this article we develop and estimate a behavioral model of inflation dynamics with heterogeneous firms in our stylized framework there are two groups of price setters fundamentalists and rando

predicting currency fluctuations and crises do resident firms have an informational advantage the authors investigate whether resident enterprise managers have an informational advantage about the countries in which they work they propose a method for extracting information available to resident managers but unknown to investors and forecasters they rest their hypothesis of informational advantage using a unique data set the global competitiveness survey the survey asks local managers about their outlook for the country in which they reside they find that local managers do have useful private information local managers responses improve on conventional forecasts of future volatility and changes in the exchange rate which are based on economic fundamentals or interest rate differentials they find that the local business community perceived in advance the recent crises in the republic of korea russia and thailand but not those in indonesia and malaysia markets have had limited success predicting crises and might do better by drawing on private information available to resident enterprise managers who seem to know better than markets about future movements in exchange rates

exchange rate forecasts and expected fundamentals using a large panel of individual professionals forecasts this paper demonstrates that good exchange rate forecasts are related to a proper understanding of fundamentals specifically good interest rate forecasts this relationship is robust to individual fixed effects and further controls reassuringly the relationship is stronger during phases when the impact from fundamentals is more obvious e g when exchange rates substantially deviate from their ppp values finally forecasters largely agree that an interest rate increase relates to a currency appreciation but only good forecasters get expected interest rates right

exchange rate predictability the main goal of this article is to provide an answer to the question does anything forecast exchange rates and if so which variables it is well known that exchange rate fluctuations are very difficult to predict using economic models and that a random walk forecasts exchange rates better than any economic model the meese and rogoff puzzle however the recent literature has identified a series of fundamentals methodologies that claim to have resolved the puzzle this article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up to date thorough empirical analysis overall our analysis of the literature and the data suggests that the answer to the question are exchange rates predictable is it depends on the choice of predictor forecast horizon sample period model and forecast evaluation method predictability is most apparent when one or more of the following hold the predictors are taylor rule or net foreign assets the model is linear and a small number of parameters are estimated the toughest benchmark is the random walk without drift

expectations driven distortions in the foreign exchange market this paper explores the phenomenon of lasting deviations of the exchange rate from its fundamental value in the foreign exchange market motivated by empirical observations a chartists fundamentalists model is developed in which boundedly rational agents repeatedly choose between technical and fundamental trading rules to determine their speculative investment positions crucial for the dynamics is how the traders perceive the fundamental exchange rate this perception process is based on psychological evidence simulations give rise to bubbles but simultaneously display quite realistic exchange rate dynamics unit roots in the exchange rates fat tails for returns and volatility clustering

heterogeneity in exchange rate expectations evidence on the chartist fundamentalist approach abstract this paper examines heterogeneity in exchange rate expectations whereas agents heterogeneity is key in modern exchange rate models evidence on determinants of heterogeneity is weak thus far our sample covering expectations from about 300 forecasters over 15 years shows remarkable time variation in dispersion determinants of dispersion are consistent with the chartist fundamentalist approach misalignments of the exchange rate and exchange rate changes explain heterogeneity the risk premium influences heterogeneity as well but possible impacts from macroeconomic variables and exchange rate s volatility are dominated by the other determinants

effects of us money announcements on the daily exchange rates of industrialized countries this paper examines the effects of anticipated and unanticipated components of us money supply announcements on exchange rates for each day of the week for eight industrialized countries the results show that most of the reaction to the anticipated component occurs before the announcement however the unanticipated component of the announcement causes strong reactions on the friday and the monday following the announcement and in the days preceding the announcement

patterns in exchange rate forecasts for twenty five currencies the properties of exchange rate forecasts are investigated with a data set encompassing a broad cross section of currencies over the entire sample expectations appear to be biased this result is robust to the possibility of random measurement error in the survey measures there appear to be statistically significant differences in the degree of bias in subgroupings of the data the bias is lower for the high inflation countries the bias is greater for the major currencies studied in earlier papers and the bias is also greater for the ems currencies copyright 1994 by ohio state university press

strategic climate policy with offsets and incomplete abatement carbon taxes versus cap and trade abstract this paper provides a first analysis of a policy bloc of fossil fuel importers which implements an optimal climate policy faces a non policy fringe of other fuel importers and an exporter bloc and purchases offset from the fringe we compare a carbon tax and a cap and trade scheme for the policy bloc in either case accompanied by an efficient offset mechanism for reducing emissions in the fringe the policy bloc is shown to prefer a tax over a cap since only a tax reduces the fuel export price and by more when the policy bloc is larger offsets are also more favorable to the policy bloc under a tax than under a cap the optimal offset price under a carbon tax is below the tax rate while under a cap and free quota trading the offset price must equal the quota price the domestic carbon and offset prices are both higher under a tax than under a cap when the policy bloc is small when the policy bloc is larger the offset price can be higher under a cap fringe countries gain by mitigation in the policy bloc more under a carbon tax since the fuel import price is lower

evaluating japanese corporate executives forecasts under an asymmetric loss function abstract we examine asymmetry in the loss function of japanese corporate executives in their output growth forecasts and test for rationality of the forecasts under the assumption of a possibly asymmetric loss function we find evidence of asymmetry and support for rationality under an asymmetric loss function

forward premiums as unbiased predictors of future currency depreciation a non parametric analysis abstract a large body of literature employing regression analysis has reported that the forward premium is not an unbiased predictor of future currency depreciation many studies argue that the forward market unbiasedness hypothesis may be falsely rejected due to biased parameter estimates possible sources of bias include the existence of a time varying risk premium systematic forecast errors and measurement errors this paper investigates whether the forward premium can predict the direction of change in the future spot exchange rate using a distribution free non parametric approach our tests strongly reject the unbiasedness hypothesis and conclude that the forward premium contains either no information or the wrong information about future currency depreciation

a directional evaluation of corporate executives exchange rate forecasts we investigate the directional accuracy of exchange rate forecasts by corporate executives we find that a forecast with a 1 year horizon is valuable for the profitability and unprofitability predictions of manufacturers although previous studies provide considerable evidence that forecasts with horizons of 1 year and longer are not valuable however a forecast is not valuable in predicting an appreciation or depreciation of the exchange rate our findings suggest that corporate executives are more concerned about and focused on the impact of the exchange rate on their profitability rather than the exchange rate itself

methodical madness technical analysis and the irrationality of exchange rate forecasts substantial empirical research documents that exchange rate forecasts are not formed rationally this paper identifies a common technical trading signal the head and shoulders pattern as a potential source of departures from rationality in exchange rate forecasts forecasts based on this pattern are evaluated for daily dollar exchange rates over 1973 to 1994 using two criteria for rationality profitability and efficiency resulting profits replicable in real time are tested for statistical significance using a bootstrap technique we find that the rule is profitable but not efficient since it is dominated by simpler trading rules

how to improve the performance of carbon tax in china abstract the chinese government committed to controlling carbon dioxide co 2 emissions and promoting development of non fossil fuels thus it becomes a top priority for the government to develop effective climate policies against such background this paper develops a new multi country computable general equilibrium cge model with detailed energy disaggregation this study evaluates the impact of single policy instrument carbon tax and combined policy mixes in order to investigate driving factors affecting the policy performance the main findings are as follows firstly the driving factors can be classified into two types the first type of factors affects cost effectiveness significantly while the second type generates considerable effect on emission performance secondly cross border externalities function as important barriers to the co 2 emission reduction since they imply extra competitiveness loss and result in considerable carbon leakage finally this paper considers two integrated policy mixes wherein carbon tax revenue is recycled to reduce capital tax or support clean energy subsidy these policy mixes can improve both cost effectiveness and emission performance and thus perform better than carbon tax alone in this way carbon tax revenue can be used to improve the performance looking ahead complicated policy mixes are preferred to improve the performance of china s carbon tax

the cross country implications of alternative climate policies abstract because of worldwide growing concerns about global climate change great interest has been expressed in the potential of alternative climate policies to reduce global carbon emissions in this paper we compare cross country implications of alternative climate policies including unilateral and multilateral climate policies our main findings are as follows firstly there are large differences in cross country effects of alternative unilateral climate policies when the same given carbon emission reductions are achieved in each abating country respectively meanwhile cross border externalities undermine efficiency of unilateral climate policies secondly there are significant differences in cross country implications of alternative multilateral climate policies when the same global emission reductions are allocated in several different ways among abating countries thirdly it is difficult to reach a stable global climate treaty since any abating country has the incentive to argue for small carbon emission reductions finally multilateral climate policies can reduce the negative impacts of cross border externalities but cannot cure all cross border externalities looking ahead it will be a great policy challenge for the world to reduce carbon emissions in a cost effective way

simple monetary policy rules and exchange rate uncertainty abstract we analyze the performance and robustness of some common simple rules for monetary policy in a new keynesian open economy model under different assumptions about the exchange rate model adding the exchange rate to an optimized taylor rule that responds to cpi inflation gives only small improvements in terms of economic stability in most model configurations the taylor rule is also slightly more robust to uncertainty about the exchange rate model than are rules that respond to the rate of exchange rate depreciation our results thus indicate that the taylor rule is sufficient to stabilize a small open economy also under exchange rate model uncertainty

can information heterogeneity explain the exchange rate determination puzzle empirical evidence shows that most exchange rate volatility at short to medium horizons is related to order flow and not to macroeconomic variables we introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model in order to explain these stylized facts consistent with the evidence the model implies that a observed fundamentals account for little of exchange rate volatility in the short to medium run b over long horizons the exchange rate is closely related to observed fundamentals c exchange rate changes are a weak predictor of future fundamentals and d the exchange rate is closely related to order flow

double question survey measures for the analysis of financial bubbles and crashes this article proposes a new double question survey whereby an individual is presented with two sets of questions one on beliefs about current asset values and another on price expectations a theo

international interest rate linkages and the exchange rate regime abstract return differentials between instruments denominated in canadian dollars and instruments denominated in american dollars are investigated the study compares the properties of return differentials in the period of fixed exchange rates during the 1960s and in the period of flexible exchange rates during the 1970s and 1980s both real and nominal return differentials are investigated the results indicate that the change in exchange rate regime is not associated with a change in the average level of ex post return differentials between canada and the united states models which predict ex ante return differentials from available information in a rational expectations framework show a surprisingly large amount of structural stability across the regime change the major impact of the flexible exchange rate regime is on the variance of ex post return differentials and not on the average level of ex post or ex ante return differentials jel e42 e58 g15

currency forecast errors and carry trades at times of low interest rates evidence from survey data on the yen dollar exchange rate abstract using survey expectations data and a variant of the uncovered interest rate parity uirp this paper evaluates the relationship between interest rates and investors forecast errors about the yen dollar exchange rate this study therefore is related to the forward premium puzzle and the currency carry trade strategy using relatively short i e 1 to 6 month ahead forecast data we obtain the following results first with the same forecast horizon exchange rate forecasts are homogeneous among different industry types but within the same industry exchange rate forecasts differ if the forecast time horizon is different second while forecast errors are found to be partly driven by interest rate spreads evidence against the uirp is provided consistent with this finding our coefficients on interest rate spreads obtained from nonlinear models provide indirect evidence of the yen carry trade in particular unlike theoretical predictions the carry trade is found to be active during financial turmoil and when there is a clear indication that the interest rate will be low in the future

on the internal consistency of short term medium term and long term oil price forecasts we derive internal consistency restrictions on short medium and long term oil price forecasts we then analyse whether oil price forecasts extracted from the survey of professional forecasters spf conducted by the european central bank ecb satisfy these internal consistency restrictions we find that neither short term forecasts are consistent with medium term forecasts nor that medium term forecasts are consistent with long term forecasts using a more complex expectation formation structure featuring a distributed lag structure however we find stronger evidence of internal consistency of medium term forecasts with long term forecasts

disagreement and learning in a dynamic contracting model we present a dynamic contracting model in which the principal and agent disagree about the resolution of uncertainty and we illustrate the contract design in an application with bayesian learning the disagreement creates gains from trade that the principal realizes by transferring payment to states that the agent considers relatively more likely changing incentives the interaction between incentive provision and learning creates an intertemporal source of disagreement risk that alters optimal risk sharing there is an endogenous regime shift between economies with small and large belief differences and an early shock to beliefs can lead to large persistent differences in variable pay even after beliefs have converged under risk neutrality selling the firm to the agent does not implement the first best because it precludes state contingent trades the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please email journals permissions oxfordjournals org oxford university press

rational expectations in the foreign exchange market some survey evidence this paper uses a survey data set that includes a large cross section of currencies to test for the rationality of expectations in the foreign exchange market two standard tests are applied to the data first a test to determine if investors make systematic forecast errors second a test to determine if investors use all available information efficiently when they make their forecasts this paper s data set involves a more recent time period which saw more quiescent exchange rate changes than the 1980s this paper finds that participants in the foreign exchange market do make systematic forecast errors and do not always use all available information when forecasting this conclusion is similar to past research but is now extended to a broader range of currencies and more recent time period

expectation formation in the foreign exchange market a time varying heterogeneity approach using survey data using consensus economics survey data on jpy usd and gbp usd exchange rate expectations for the 3 and 12 month horizons over the period november 1989 december 2012 we first show that expectations fail the conventional tests of unbiasedness and do not exhibit a learning process towards rationality our approach is consistent with the economically rational expectations theory feige and pearce 1976 which states that information costs and agents aversion to misestimating future exchange rates determine the optimal amounts of information on which they base their expectations the time variability of the cost aversion ratios justifies at the aggregate level a representation of expectations as a linear combination of the traditional extrapolative adaptive and regressive processes augmented by a forward market component whose parameters are allowed to change over time this mixed expectation model with unstable heterogeneity is validated by our kalman filter estimation results for the two currencies and

heterogeneous expectations and tests of efficiency in the yen dollar forward exchange rate market this paper examines the efficiency of the forward yen dollar market using micro survey data conventional tests of unbiasedness do not correspond directly to the zero profit condition instead we use the survey data to calculate potential profits of individual forecasters based on a natural trading rule we find that although the survey data are not the best predictor of future spot rates in terms of typical mean square forecast error criteria the survey data can be used to obtain on average positive profits however these profits are small and highly variable similar results are found when we examine profits generated by a trading rule using regression forecasts the profits are found to be correlated with risk type variables but not other available information

exchange rate expectations the role of person specific forward looking variables abstract we analyze how individual forecasters build their foreign exchange rate expectations the wall street journal poll allows us to incorporate explanatory variables such as expected inflation rates and expected gdp growth rates that are both forward looking and person specific

will carbon motivated border tax adjustments function as a threat abstract due to large incremental carbon emissions china might become an important target country of cbta carbon motivated border tax adjustments to levy cbta could reduce china s emissions meanwhile china s emissions reduction could also be achieved by china s climate policies termed as cbta emissions equivalent policies this paper contributes to the discussion on cbta by comparing the potential regional effects of cbta and cbta emissions equivalent policies the main findings are as follows 1 cbta and cbta emissions equivalent policies would result in relocations of outputs across regions and countries affect the structure of economy and contribute to world s emissions reduction 2 there would be significant differences in the regional effects between cbta and cbta emissions equivalent policies 3 compared to carbon tax cbta would be a costly and inefficient policy instrument to reduce emissions but could function as an effective coercion strategy 4 these policies would result in competitiveness issue and rebound effects wherein different countries would be affected differently china is a large economy and energy consumer with high openness to international trade looking ahead the chinese government should consider the potential interactions between china and other economies when designing tax reforms

the quality of bank forecasts the dollar pound exchange rate 1990 1993 abstract a general framework for examining the quality of currency forecasts is described this framework incorporates existing accuracy measures and modifies them to give components of accuracy that are appropriate for statistically derived and judgementally based forecasts the framework is described and applied to one week ahead us uk forecasts from three major banks over a three year period between 1990 and 1993 the results suggest that while overall forecast performance was poor some aspects of the predictions could still be useful in a practical setting

an empirical examination of heterogeneity and switching in foreign exchange markets using a unique dataset of survey expectations this paper examines the extent to which the classical fundamentalist chartist dichotomy is valid for the foreign exchange market by applying a recursive selection algorithm 1 respondents are classified into the two groups and 2 the forecasting models are endogenously determined within the groups a large part of the variation in expectations can be explained by the fundamentalist chartist distinction switching however takes place between a naive and a sophisticated model that consists of both fundamentalist and chartist elements the sophisticated model is increasingly used as the forecast horizon increases

oil price forecasting under asymmetric loss based on the approach developed by elliott et al 2005 we found that the loss function of a sample of oil price forecasters is asymmetric in the forecast error our findings indicate that the loss oil price forecasters incurred when their forecasts exceeded the price of oil tended to be larger than the loss they incurred when their forecast fell short of the price of oil accounting for the asymmetry of the loss function does not necessarily make forecasts look rational

macroeconomic forecasts and microeconomic forecasters in the presence of principal agent problems published macroeconomic forecasts by professional economists may not measure expectations forecasters may use their forecasts in order to manipulate beliefs about their ability i test a cross sectional implication of models of reputation and information revelation i find that as forecasters become older and more established they produce more radical forecasts since these more radical forecasts are in general less accurate ex post forecast accuracy grows significantly worse as forecasters become older and more established these findings are consistent with reputational factors at work in professional macroeconomic forecasts

heterogeneous expectations and strong uncertainty in a minskyian model of financial fluctuations abstract we examine the role of expectations in a model aimed to explain financial fluctuations the model restates the core of minsky s financial instability hypothesis focusing on the role of expectations the hypotheses concerning the process of formation and revision of expectations are discussed in light of keynes s epistemological view of the behavior of boundedly rational agents under conditions of strong uncertainty these hypotheses are formalized by drawing on recent advances in complex dynamics decision theory and behavioral economics we show that widespread use of extrapolative expectations by economic agents produces a high degree of financial instability that may lead to a serious financial crisis and that the use by economic agents of a mix of extrapolative and regressive expectations reduces the dynamical instability of the model but may give rise to complex dynamics

cognitive ability and earnings performance evidence from double auction market experiments abstract our goal in this paper is to understand how heterogeneity in people s cognitive ability leads to different market behavior and thus different market performance to do this subjects with heterogeneous working memory capacity wmc were placed in a double auction environment to compete against artificial traders we considered two treatments which differ in the artificial traders the artificial traders are truth telling in the first treatment but demonstrate adaptive trading behavior in the second one our results show that working memory capacity has a significantly positive effect on subjects market performance and the performance gap caused by cognitive ability while narrowing over time remains significant by the end of experiment we find that differences in subjects performance resulted from their behavior high wmc subjects were better at exploiting extra profit opportunities and avoiding unprofitable transactions and they tended to underbid more than those with lower wmc among the five constituent abilities of wmc we find that it is distinctive abilities which contribute to the overall significance in these two treatments for the treatment involving truth telling traders the relevant factor is the ability of simultaneous processing and storing information whereas for the treatment involving adaptive traders the only one that matters is subjects ability to coordinate elements into structures

exchange rate expectations of chartists and fundamentalists this paper provides novel evidence on exchange rate expectations of both chartists and fundamentalists separately these groups indeed form expectations differently chartists change their expectations more often however all professionals expectations vary considerably as they generally follow strong exchange rate trends in line with non linear exchange rate modeling professionals expect mean reversion only if exchange rates deviate much from ppp chartists survive in fx markets as they forecast equally accurately as fundamentalists unexpected from an effcient market viewpoint chartists even outperform fundamentalists at short horizons overall these findings clearly support the chartist fundamentalist approach

disagreement and biases in inflation expectations empirical work documents substantial disagreement in inflation expectations obtained from survey data furthermore the extent of such disagreement varies systematically over time in a way that reflects the level and variance of current inflation this paper oers a simple explanation for these facts based on asymmetries in the forecasters costs of over and under predicting inflation our model implies biased forecasts with positive serial correlation in forecast errors and a cross sectional dispersion that rises with the level and the variance of the inflation rate it also implies that forecast errors at dierent horizons can be predicted through the spread between the short and long term variance of inflation we find empirically that these patterns are present in inflation forecasts from the survey of professional forecasters a constant bias component not explained by asymmetric loss and rational expectations is required to explain the shift in the sign of the bias observed for a substantial portion of forecasters around 1982

exchange rate expectations and functional misspecification the authors employ the cooley prescott adaptive model to examine for functional misspecification in three commonly used exchange rate expectation models they also test for heterogeneity among forecasts the authors find no serious misspecification problem but some heterogeneity in expectations these test results are confirmed by various other regression specification tests copyright 1994 by mit press

regional energy efficiency carbon emission performance and technology gaps in china a meta frontier non radial directional distance function analysis abstract at present china is the largest primary energy consumer and carbon emitter in the world meantime china is a large transitional economy with significant regional gaps against such backgrounds the calculated results of energy and carbon performance indicators may be biased without considering heterogeneity across regions to this end after incorporating region heterogeneity this paper provides detailed information regarding energy efficiency carbon emission performance and the potential of carbon emission reductions from regional perspectives which may be important and useful for policy makers our main findings are as follows firstly there is significant group heterogeneity across regions in china in terms of energy efficiency and carbon emission performance secondly there are no considerable differences between total factor and single factor performance indices since there is limited substitutability between energy inputs and other production inputs finally significant carbon emission reductions can be made by catching up for regions with low energy efficiency and carbon emission performance looking ahead the chinese government should adopt measures to promote improvements in terms of energy efficiency and carbon emission performance in the short term

a proximate mirror greenhouse gas rules and strategic behavior under the us clean air act the development of climate policy in the united states mirrors international developments with efforts to initiate a coordinated approach giving way to jurisdictions separately taking actions the centerpiece of us policy is regulation in the electricity sector that identifies a carbon emissions rate standard intensity standard for each state but leaves to states the design of policies including potentially the use of technology policies emissions rate averaging or cap and trade differences in policies among states within the same power market could promote predatory behavior resulting in a geographic shift in generation and investment in new resources this paper examines the coordination problem using a detailed partial equilibrium model of operations and investment we demonstrate that leading jurisdictions have available a rich set of design options including targetted output based allocation that would impose costs on neighbors and may protect against strategic predation

on the biasedness of forward foreign exchange rates irrationality or risk premia in this article the authors reconsider the k a froot and j a frankel 1989 results on the sources of forward discount bias they question the economic validity of some estimation restrictions that they impose and thus are led to question some of their results the authors employ a new exchange rate survey database that includes european monetary system currencies and use univariate and pooling estimation techniques that impose fewer restrictions than those of froot and frankel to test their hypotheses they find that the bias in the forward discount is attributable to both the failure of rational expectations and the existence of time varying risk premia copyright 1994 by university of chicago press

testing the rationality of doe s energy price forecasts under asymmetric loss preferences this paper examines the rationality of the price forecasts for energy commodities of the united states department of energy s doe departing from the common assumption in the literature that doe s forecasts are based on a symmetric underlying loss function with respect to positive vs negative forecast errors instead we opt for the methodology of elliott et al 2005 that allows testing the joint hypothesis of an asymmetric loss function and rationality and reveals the underlying preferences of the forecaster results indicate the existence of asymmetries in the shape of the loss function for most energy categories with preferences leaning towards optimism moreover we also examine whether there is a structural break in those preferences over the examined period 1997 2012

why are professional forecasters biased agency versus behavioral explanations professional forecasters may not simply aim to minimize expected squared forecast errors in models with repeated forecasts the pattern of forecasts reveals valuable information about the forecasters even before the outcome is realized rational forecasters will compromise between minimizing errors and mimicking prediction patterns typical of able forecasters simple models based on this argument imply that forecasts are biased in the direction of forecasts typical of able forecasters our models of strategic bias are rejected empirically as forecasts are biased in directions typical of forecasters with large mean squared forecast errors this observation is consistent with behavioral explanations of forecast bias

technical analysis and the effectiveness of central bank intervention abstract using daily data on foreign exchange interventions of both the bundesbank and the fed we provide further evidence that central banks earn profits with interventions and that technical trading rules are unusually profitable on days on which interventions take place we argue that what lies at the root of these seemingly contradictory results is that a intervention profits and trading rule profitability are measured over different horizons and b after interventions exchange rates tend to move contrary to central banks intentions in the short run but in agreement with their intentions in the long run

dynamic portfolio adjustment and capital controls a euler equation approach we present a multiasset dynamic portfolio balance model that is based on the maximization of an intertemporal utility function in consumption when investors operate under uncertainty quadratic adjustment costs and capital market regulations we estimate the model s structural parameters on quarterly portfolio data of the german private sector asset demand is insensitive to return changes although the coefficients are significant adjustment costs are low but highly significant giving rise to moderate lags of adjustment still existing capital controls and adjustment costs cannot explain the currently observed home bias in the portfolio overall our results imply a strong rejection of the portfolio model

determinants of japanese direct investment in us manufacturing industries abstract a hybrid model of direct investment is developed from an asset portfolio model and an industrial organization model of investment encompassing tests using disaggregated data validate the hybrid model while its two component models are rejected by at least some of the data the exchange rate is found to be an important explanatory variable for direct investment in some but not all of us industries equity purchase is more likely in r d intensive industries in privately held companies and in highly concentrated industries plant and equipment investment is more likely in industries with increasing returns to scale and in industries experiencing large net export deficits with japan jel f21

the expectations hypothesis new hope or illusory support abstract recent studies of the expectations hypothesis of the term structure ehts find evidence in favor of the ehts using post 1980s us data this has been attributed to the relative macro stability of this period and greater market efficiency using a panel of forecasts for 3 month interest rates for ten countries we test separately for ehts and rational expectations assuming rational expectations holds we find support for the ehts is illusory due to an off setting time varying term premia and non rational expectations previous forecast based studies suggest biased expectations tend to reinforce the effect of a time varying term premium this change can be understood in the context of fama s 2006 argument that markets tend to underestimate future spot rates during periods of long run increases and overestimate during declines

investment pass through and exchange rates a cross country comparison using detailed data from the united states canada the united kingdom and japan we examine the implications of exchange rates for time series of sectoral investment both theoretically and empirically we show that investment responsiveness to exchange rates varies over time positively in relation to sectoral reliance on export share and negatively with respect to the share of imported inputs in production important differences exist in investment endogeneity across high and low price over cost markup sectors with investment in low markup sectors often significantly more responsive to exchange rates cross country differences in investment response are only partially explained by industrial organization arguments

learning to forecast the exchange rate two competing approaches this paper compares two competing approaches to model foreign exchange market participants behavior statistical learning and fitness learning these learning mechanisms are applied to a set of predictors chartist and fundamentalist rules we examine which of the learning approaches is best in terms of replicating the exchange rate dynamics within the framework of a standard asset pricing model we find that both learning methods reveal the fundamental value of the exchange rate in the equilibrium but only fitness learning creates the disconnection phenomenon and only statistical learning replicates volatility clustering none of the mechanisms is able to produce a unit root process but both of them generate non normally distributed returns

biases in macroeconomic forecasts irrationality or asymmetric loss empirical studies using survey data on expectations have frequently observed that forecasts are biased and have concluded that agents are not rational we establish that existing rationality tests are not robust to even small deviations from symmetric loss and hence have little ability to tell whether the forecaster is irrational or the loss function is asymmetric we quantify the exact trade off between forecast inefficiency and asymmetric loss leading to identical outcomes of standard rationality tests and explore new and more general methods for testing forecast rationality jointly with flexible families of loss functions that embed quadratic loss as a special case an empirical application to survey data on forecasts of nominal output growth demonstrates the empirical significance of our results and finds that rejections of rationality may largely have been driven by the assumption of symmetric loss

would international currency taxation and currency stabilisation in developing countries completely flexible exchange rates may be excessively volatile with the implied currency misalignments leading to real inefficiencies in resource allocation and detrimental effects on economic growth this paper analyses whether international currency taxation would be effective in calming exchange rate volatility and avoiding currency crises within the context of a simple model of exchange rate determination it is found that the effects of a tax on foreign exchange volatility depend on the nature of speculation and whether the focus is on capital inflows or outflows

exchange rate dynamics central bank interventions and chaos control methods abstract we use a simple chartist fundamentalist model developed by day and huang to explore recent chaos control algorithms as potential candidates for central bank intervention rules we find that methods such as delayed feedback control ogy and constant feedback have in principle the potential to reduce exchange rate variability and deviations from fundamentals even in the presence of large dynamic noise

rationality of survey data and tests for market efficiency in the foreign exchange markets abstract this paper tests the rational expectations hypothesis reh and the market efficiency hypothesis meh in the foreign exchange markets using survey data on expectations our results show that the spot exchange rates expected exchange rates and the forward rates all follow a random walk process hence the cointegration theory is employed to test the reh and meh all the test statistics support the reh but fail to support the meh we use survey data on expectations to identify the causes behind this failure of the meh jel f31 g14

foreign exchange rate expectations micro survey data this paper analyzes the panel data of biweekly surveys on the yen dollar exchange rate expectations of forty four institutions for two years and contains four major findings first market participants are heterogeneous that is significant individual effects exist in their expectation formation second the individual effects have a characteristic of wishful expectations exporters expect yen depreciation and importers expect yen appreciation relative to others third many violate the rational expectations hypothesis fourth forecasts with long horizons show less yen appreciation than those with short horizons cross equation constraints implied by the consistency of the forecast term structure are strongly rejected in the data copyright 1990 by american economic association

evaluating the joint efficiency of german trade forecasts a nonparametric multivariate approach i analyse the joint efficiency of export and import forecasts by leading economic research institutes for the years 1970 to 2017 for germany in a multivariate setting to this end i compute in a

why do we reject the mean variance model a two stage test procedure for the static mean variance portfolio model is presented which focuses on increasingly restrictive versions of the general model it also delivers clues to the probable cause of rejection the procedure is applied to quarterly data for german private net wealth the mean variance restrictions are strongly rejected because the data reject any positive semi definite link between returns and asset holdings this suggests that the failure of the model is not primarily caused by neglect of the time variation of conditional covanances

using survey data to resolve the exchange risk exposure puzzle evidence from u s multinational firms while in previous literature foreign currency exposure is estimated to be surprisingly small and insignificant we question in this paper the rationality assumption and show that the traditional use of realized exchange rate changes to approximate unexpected currency shocks leads to a strong underestimation of the influence that exchange rates play in determining firm valuations in light of a unique survey data base of individual exchange rate expectations we distinguish between realized and unexpected foreign currency movements and find that half of our sample of 935 u s firms with real operations in foreign countries is significantly exposed to unexpected exchange rate movements in line with previously reported results foreign exchange risk exposure is found to become increasingly perceptible when the return horizon is lengthened the difference between the exposure to realized versus unexpected exchange rate movements is however decreasing when lengthening the horizon suggesting that the more market participants disagree about the future path of currency values the less investors and or managers are likely to use the publicly available forecasts in their pricing and hedging decisions

to aggregate pool or neither it is well known that even if all forecasters are rational unbiasedness tests using consensus forecasts are inconsistent because forecasters have private information however if all forecasters face a common realization pooled estimators are also inconsistent in contrast we show that when predictions and realizations are integrated and cointegrated microhomogeneity ensures that consensus and pooled estimators are consistent therefore contrary to claims in the literature in the absence of microhomogeneity pooling is not a solution to the aggregation problem we reject microhomogeneity for a number of forecasts from the survey of professional forecasters therefore for these variables unbiasedness can only be tested at the individual level