Testing the Rationality of Exchange Rate Expectations: Evidence from Survey Data

The present study has two important implications. First, It contributes to a better understanding of famous forward discount puzzle in international finance. The puzzle is that forward discount is a biased predictor of future exchange rate changes. There are two explanations of this bias. The failure could be due to the presence of a time varying risk premium, or it is due to the failure of rational expectations by the agents. In other words, agents do not use all available information efficiently. There have been a lot of studies on this issue using different econometric methods.