Long-horizon exchange rate expectations

Kremens, Lukas, Martin, Ian ORCID: 0000-0001-8373-5317 and Varela, Liliana ORCID: 0000-0001-6139-1461 (2025) Long-horizon exchange rate expectations. Journal of Finance. ISSN 0022-1082 (In Press)

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Abstract

We study exchange rate expectations in surveys of financial professionals and find that they successfully forecast currency appreciation at the two-year horizon, both in and out of sample. Exchange rate expectations are also interpretable, in the sense that three macrofinance variables—the risk-neutral covariance between the exchange rate and equity market, the real exchange rate, and the current account relative to GDP—explain most of their variation. But there is no “secret sauce” in expectations: after controlling for the three macro-finance variables, the residual information in survey expectations does not forecast currency appreciation in our sample.

Item Type:	Article
Additional Information:	© 2025 The Author(s)
Divisions:	Finance
Subjects:	H Social Sciences > HG Finance
Date Deposited:	02 Apr 2025 11:27
Last Modified:	02 Apr 2025 11:30
URI:	http://eprints.lse.ac.uk/id/eprint/127790

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