http://repub.eur.nl/res/aut/19495/ List of Publications en http://repub.eur.nl/static-eur/img/logo.png http://repub.eur.nl http://repub.eur.nl/res/pub/38037/ 2012-05-01T00:00:00Z 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. http://repub.eur.nl/res/pub/37937/ 2012-03-01T00:00:00Z This paper examines the effect of unexpected exchange rate movements on U.S. shareholder wealth. Empirical results based on a sample of 634 U.S. multinational firms (1) confirm previously reported evidence that the disaggregation of the worldwide trade-weighted U.S. dollar exchange rate index into seven region-specific trade-weighted indices increases the precision and significance of exposure estimates; (2) show that models assuming that changes in spot exchange rates are unanticipated are frequently misspecified and, thus, unable to correctly detect the impact of currency movements on firm value; (3) reveal that forward and survey expectations enable us to distinguish between the effect of 'realized' and 'unexpected' currency movements; and (4) reveal that investors making pricing and hedging decisions prefer to use the information contained in short-term forward and survey expectation rates to the information included in long-term forecasts. http://repub.eur.nl/res/pub/37925/ 2012-01-01T00:00:00Z 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 http://repub.eur.nl/res/pub/23464/ 2011-06-01T00:00:00Z Using a large, previously unexplored data set of survey-based interest rate forecasts that covers a broad range of countries, this paper re-examines the expectations hypothesis of the term structure of interest rates. We find that survey-based interest rate forecasts outperform not only a random walk forecast, but also outperform forecasts from forward rates. When using these superior survey-based forecasts in a modified expectations hypothesis test, the expectations hypothesis is rejected for fewer countries, at lower significance levels, and has greater explanatory power than when using a traditional forward rates-based test. We furthermore document strong time-variation in the term premia, which is an important reason why the traditional expectations hypothesis test is rejected so frequently. This time-variation seems to arise from the changing attitudes towards risk among market participants and as a compensation for the change in liquidity in the term structure. Finally, we find that generalizing findings from earlier U.S. studies to other countries may lead to bias in the true economic relationships in these countries. http://repub.eur.nl/res/pub/21596/ 2010-12-01T00:00:00Z We develop and estimate a dynamic heterogeneous agent model for the EMS period. Our empirical results suggest that the existence of heterogeneous interacting agents is indeed a possible explanation for the dynamics of exchange rates during the EMS. We find strong evidence of heterogeneous boundedly rational beliefs, and the fact that agents switch between these beliefs. Moreover, we show that the dynamic heterogeneous agent model outperforms the random walk and the static heterogeneous agents’ model in out-of-sample forecasting in the large majority of country-horizon combinations. http://repub.eur.nl/res/pub/17165/ 2009-11-01T00:00:00Z We examine the relationship between financial crisis exchange rate variability and equity return volatility for US multinationals. Empirical analysis of the major financial crises of the last decades reveals that stock return variability increases significantly in the aftermath of a crisis, even relative to the increase in stock return volatility for other firms belonging to the same industry and market capitalization class. In conjunction with this increase in total volatility, there is also an increase in stock market risk (β) for multinational firms. Moreover, trade and service oriented industries appear to be particularly sensitive to these changing exchange rate conditions. http://repub.eur.nl/res/pub/20305/ 2009-06-01T00:00:00Z We estimate a dynamic heterogeneous agents model for the British pound during the European monetary system crisis. We illustrate the chain of events leading to the suspension of the pound from the exchange rate mechanism in terms of switching beliefs, from fundamentalist to chartist.