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The scapegoat theory of exchange rates: the first tests

Fratzscher, M., Rime, D., Sarno, L. and Zinna, G. (2015). The scapegoat theory of exchange rates: the first tests. Journal of Monetary Economics, 70, pp. 1-21. doi: 10.1016/j.jmoneco.2014.09.001

Abstract

The scapegoat theory of exchange rates (2 and 5) suggests that market participants may attach excessive weight to individual economic fundamentals, which are picked as “scapegoats” to rationalize observed currency fluctuations at times when exchange rates are driven by unobservable shocks. Using novel survey data that directly measure foreign exchange scapegoats for 12 exchange rates, we find empirical evidence that supports the scapegoat theory. The resulting models explain a large fraction of the variation and directional changes in exchange rates in sample, although their out-of-sample forecasting performance is mixed.

Publication Type: Article
Additional Information: © 2014, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: Scapegoat; Exchange rates; Economic fundamentals; Survey data
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/13155
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