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Short-run and long-run expectations of the yen/dollar exchange rate

Ito, Takatoshi

The survey data of the yen/dollar exchange rate, collected twice a month for eight years from 1985 to 1993, shows the following features. First, the expected exchange rate changes in the short horizon (one month) is of the band-wagon type while the expected changes in the long horizon (three to six months) is of the mean-reversion type. That is, foreign exchange traders infers from recent appreciations or depreciation that the recent change in the exchange rate will continue for a while, but the direction of changes will reverse, eventually. Second, this result is robust for the entire sample period, which includes sub-periods of sharp yen appreciations and of relative calm, and with respect to different specifications. Third, the deviation from an equilibrium exchange rate does not yield a robust estimate in the regression of expectation formation. Although the history of the yen/dollar exchange rate fluctuations in the past two decades shows mean reversion over several years, they are not captured in the six-month expectations in the survey data.

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Academic Units
Center on Japanese Economy and Business
Publisher
Center on Japanese Economy and Business, Graduate School of Business, Columbia University
Series
Center on Japanese Economy and Business Working Papers, 82
Published Here
February 8, 2011
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