Exchange Rate Expectations

Transcription

1 Journal of Applid Financ & Banking, vol. 8, no., 8, -34 ISSN: (prin vrsion), (onlin) Scinprss Ld, 8 Exchang Ra Expcaions Dr. Ioannis N. Kallianiois Absrac W invsiga, hr, h xchang ra xpcaions, which ar broad modls of xchang ra forcasing and fficincy, by looking a approachs, such as h saic xpcaions, h xrapolaiv, h adapiv, h raional, h rgrssiv, and som gnral spcificaions of h abov xpcaions. A h nd, orhogonaliy ss suggs ha rjcion of h unbiasd forward ra hypohsis is causd by diffrn variabls (lik nws, unxpcd shocks, lan variabls, forcas rrors in mony supplis, inrs ra diffrnials, sock mark risk prmia, and various forms of condiional varianc). Also, mpirical ss of h abov xchang ra xpcaions ar aking plac for four diffrn xchang ras ($/, $/, C$/$, and /$). Thorical discussion and mpirical vidnc hav mphasizd h impac of nws on xchang ras, which affc agns xpcaions, oo. Agns ar using h xchang ra xpcaions ffcivly. JEL classificaion numbrs: E4, F3, F47, G4, G5 Kywords: Dmand for Mony and Exchang Ra, Forign Exchang, Forcasing and Simulaion, Informaion and Mark Efficincy, Inrnaional Financial Marks. Inroducion In conomic hory, hr ar many spcificaions, which ar usd o rprsn h way ha invsors, forign currncy radrs, and spculaors form xpcaions. Ths spcificaions can b usd as forcasing modls of h xchang ra, oo. Economics/Financ Dparmn, Th Arhur J. Kania School of Managmn, Univrsiy of Scranon, Scranon, PA 85-46, U.S.A. Aricl Info: Rcivd: Novmbr, 7. Rvisd : Novmbr 7, 7 Publishd onlin : March, 8

2 Ioannis N. Kallianiois Thr ar mpirical sudis ha hav found vidnc of dviaion of h xchang ra from h spo mark fficincy and i follows a variy of xpcaion formaions. Th mos simpl-mindd assumpion abou xpcaions on can mak is ha of saic or naïv xpcaions: Agns, i is assumd, xpc h inflaion ra nx yar o b h sam as i was his yar. Also, w assum, hr, ha h policymakrs objciv is h maximizaion of h social wlfar. Furhr, adapiv xpcaions assumpion mrly xrapolas h concp of saic xpcaions; i suggss ha conomic agns xpc h inflaion ra o b qual o h wighd avrag of h inflaion ra in h pas fw priods. Economiss usd h assumpions of saic and adapiv xpcaions unil h concp of raional xpcaions was dvlopd. Ohr forms of xpcaions ar h rgrssiv ons and som gnral spcificaions modls ha can s alrnaiv xpcaions. Also, an orhogonaliy s can b usd o s h Unbiasd Forward Ra Hypohsis (UFRH), which is ncssary o confirm fficincy in h forign xchang mark 3 and o s if hr is any ffc of h quiy marks risk prmia on h xchang ras risk prmia. Thorical Modls of Exchang Ra Expcaions W sar discussing horically on by on h fiv modls of xchang ra xpcaions. Thy ar h saic xpcaions modl, h xrapolaiv xpcaions, h adapiv xpcaions, h raional xpcaions, and h rgrssiv xpcaions on. W us h assumpions and h mahmaic formulaion of ach modl, so hy can bcom comprhnsibl o h radrs.. Saic Expcaions In conomics, h concp of saic xpcaions dscribs an assumpion ha conomiss mak, abou h way popl form hir prdicions, rgarding h fuur valus of conomic variabls. Spcifically, h saic xpcaions assumpion sas ha popl xpc h valu of an conomic variabl nx priod o b qual o h currn valu of his variabl. 4 Thn, h simpls form of S, Kallianiois [8] and [9]. Also, Moosa [9], hp://books.googl.com/books?id=aj5u- wq54sc&pg=pa7&lpg=pa7&dq=exchang+ra+expcaions+(saic,+xrapolaiv)&sourc =bl&os=fudrzx9yk6&sig=9sru77mgqbj_kp3zvn69ddy_y4&hl=n&sa=x&i=kqviup_u NafwgHXjoCwBA&vd=CD4Q6AEwBA#v=onpag&q=Exchang%Ra%Expcaions %(saic%c%xrapolaiv)&f=fals. Furhr, Mary [7] hp://arno.unimaas.nl/show.cgi?fid=8 3 S, Kallianiois [5]. 4 Th concp of saic xpcaions has bn widly usd in h arly conomics liraur, such as in h cobwb modl of pric drminaions. In h cobwb modl, h saic xpcaions assumpion sas ha sllrs xpc h pric of a good nx priod o b h sam as i is oday and adjus hir producion accordingly. Th arly liraur did no focus much on unxpcd shocks. Th concp of saic xpcaions and is mor advancd variaion, h concp of adapiv

3 Exchang Ra Expcaions 3 xchang ra xpcaions is saic xpcaions, which mans ha xpcaions of h fuur spo ra ar nohing mor han h currn spo ra. This procss can b raionalizd by h fac ha h obsrvd xchang ras appar o b saionary and invsors s no paricular rason why h nx priod s xchang ras would dvia from h currn spo ra. s s () or s s () and is growh is, s (3) whr, s = h ln of h spo xchang ra ( S ), s = h ln of h xpcd spo xchang ra in priod, and s = h xpcd prcnag chang of h spo xchang ra. Thus, h xpcd currncy dprciaion ( fd ) or apprciaion ( fp ) is zro. 5 Th main criicism of h concp of saic xpcaions is ha i assums ha popl ignor h informaion abou possibl shifs in policy variabls. In h cas of monary policy, if policymakrs announc crdibly ha hy will adop an ani-inflaionary sanc, i would no b raional for conomic agns o bliv ha h inflaion ra will rmain h sam. Thus, h raional xpcaions assumpion incorporas all possibl informaion availabl, a h im h xpcaions ar formulad, and no jus h pas valus of h variabl bing forcasd, as is h cas wih saic or adapiv xpcaions. In modrn conomic hory, mos modls ha incorpora uncrainy abou h fuur assum raional xpcaions, no saic xpcaions. Nvrhlss, som conomic variabls and many financial variabls follow a spcific sochasic procss, calld maringal [a modl of a fair gam, whr knowldg of pas vns will nvr hlp o prdic fuur winnings; a squnc of xpcaions, play an imporan rol in h monary conomics, h branch of conomics ha addrsss h dsign and h impac of monary policy. Bcaus only unxpcd inflaion, or inflaion ra in xcss of h xpcd inflaion ra, can incras h aggrga oupu of h conomy, i is imporan for policymakrs o know wha inflaion ra conomic agns xpc in h fuur. For conomiss, his mans ha hy hav o mak an assumpion abou how conomic agns form hir prdicions of fuur inflaion, how hy masur i, and if h monary policy arg ra will covr h xpcd inflaion. S, Kallianiois [4]. 5 Whr, fd or fp ( s s ).. ( as % p. a.). n

4 4 Ioannis N. Kallianiois random variabls (i.., a sochasic procss)], for which h bs prdicion of h fuur valu is oday s valu. For hs variabls, saic xpcaions urn ou o b raional xpcaions.. Exrapolaiv Expcaions Exrapolaiv xpcaions ar hos ha xpc h fuur xchang ra will mov according o a rcn rnd. Th abov saic modl [q. ()] can b modifid, now, o h following on: s s ( s s ) (4) ( whr, = is a cofficin and s s ) = h rcn chang in h xchang ra. Th raional is, hr, ha rcn movmns of xchang ras ar nonsaionary. I can b hypohsizd ha currncy dprciaion in h currn priod will gnra an xpcaion of fuur dprciaion; hn, q. (4) can b wrin as follows: s s (5) whr, (xpcaions mov h sam dircion). Ths bandwagon xpcaions 6 ar considrd o b highly unsabl sinc invsors sll a currncy ha hy xpc o dprcia and vic vrsa. Spculaiv 6 Th bandwagon ffc is a wll-documnd form of grouphink (ὁ κοσμικός ἄνθρωπος εἶναι μιμητικόν ὄν) in bhavioral scinc and has many applicaions. Th gnral rul is ha conduc or blifs sprad among popl, as fads and rnds clarly do, wih h probabiliy of any individual adoping i incrasing wih h proporion, which hav alrady don so. As mor popl com o bliv in somhing, ohrs also hop on h bandwagon rgardlss of h undrlying vidnc. Th ndncy o follow h acions or blifs of ohrs can occur bcaus individuals dircly prfr o conform or bcaus individuals driv informaion from ohrs. In layman s rm h bandwagon ffc rfrs o popl doing crain hings bcaus ohr popl ar doing hm, rgardlss of hir own blifs, which hy may ignor or ovrrid. For insanc, onc a produc bcoms popular, mor popl nd o g on h bandwagon and buy i, oo. Th bandwagon ffc has wid implicaions, bu is commonly sn in poliics and consumr bhavior. This ffc is noicd and is followd vry much by h youh and h popl wihou prsonaliy (h ignoran ons); whr, if young popl s many of hir frinds buying a paricular phon, hy could bcom mor inrsd in buying ha (Appl producs for xampl). Whn individuals mak raional choics basd on h informaion hy rciv from ohrs, conomiss hav proposd ha informaion cascads can quickly form, in which popl dcid o ignor hir prsonal informaion signals and follow h bhavior of ohrs. Cascads xplain why bhavior is fragil; popl undrsand ha hy ar basd on vry limid informaion. As a rsul, fads form asily, bu ar also asily dislodgd. Such informaional ffcs hav bn usd o xplain poliical

5 Exchang Ra Expcaions 5 aciviis can b sabilizing, if h opposi dircion is xpcd for h xchang ras (a dprciaion of h currncy is xpcd o b followd by an apprciaion). Thn, and q. (5) bcoms: s s (6) or q. (4) givs, in his cas: s ( ) s s (7) Equaion (7) is calld h disribud lag xpcaions modl. Th xpcaions of xchang ras ar formd on h basis of currn and laggd spo xchang ras. Hr, longr lags ar assumd o hav no informaional conn..3 Adapiv Expcaions In conomics, adapiv xpcaions mans ha popl form hir xpcaions abou wha will happn in h fuur basd on wha has happnd in h pas. This approach has bn usd o modl pric bhavior. For xampl, if inflaion has bn highr han xpcd in h pas, popl would rvis xpcaions for h fuur. In adapiv xpcaions, h xpcd fuur spo ra is a wighd avrag of h currn and laggd xpcd ra, as follows: s ( ) s s (8) whr, and s E( s I ) s s. or Equaion (8) bcoms: s s ( s s ) (9) s ( s s ) () Equaion () sas ha xpcaions ar rvisd on h basis of h xpcaions rror ( s s ). This rror adjusmn is also calld parial adjusmn. Th magniud of h rvision dpnds on h cofficin. bandwagons. This is h bhavior of masss (goyim), which unforunaly, ar manipulad by h dark powrs ( dp sa ) and saisfy hir inhuman objciv. S, Kallianiois [3].

6 6 Ioannis N. Kallianiois Onc a forcasing rror is mad by agns, du o a sochasic shock, hy will b unabl o corrcly forcas h pric lvl again vn if h pric lvl xprincs no furhr shocks sinc hy only vr incorpora par of hir rrors. Th backward naur of xpcaion formulaion and h rsulan sysmaic rrors mad by agns (s Cobwb modl) 7 was unsaisfacory o conomiss such as Muh [3], who was pivoal in h dvlopmn of an alrnaiv modl of how xpcaions ar formd, calld raional xpcaions. This has largly rplacd adapiv xpcaions in macroconomic hory sinc is assumpion of opimaliy of xpcaions is consisn wih conomic hory..4 Raional Expcaions Raional xpcaions is a hypohsis in conomics, 8 which sas ha agns prdicions of h fuur valu of conomically rlvan variabls ar no sysmaically wrong, in ha all rrors ar random. Equivalnly, his is o say ha agns xpcaions ar qual o h ru saisical xpcd valus. Th raional xpcaions assumpion is usd in many conmporary macroconomic modls, in gam hory, and in ohr applicaions of raional choic hory. Sinc mos macroconomic modls oday sudy dcisions ovr many priods, h xpcaions of workrs, consumrs, and firms abou fuur conomic condiions ar an ssnial par of h modl. How o modl hs xpcaions has long bn conrovrsial; i is wll known ha h macroconomic prdicions of h modl may diffr, dpnding on h assumpions mad abou xpcaions. 9 To assum raional xpcaions is o assum ha agns xpcaions may b individually wrong, bu ar corrc on avrag. In ohr words, alhough h fuur is no fully prdicabl, agns xpcaions ar assumd no o b sysmaically biasd and us all rlvan informaion in forming xpcaions of conomic variabls. Modling xpcaions is crucial in all modls, which sudy how a larg numbr of individuals, firms, and organizaions mak choics undr uncrainy. For xampl, ngoiaions bwn workrs and firms will b influncd by h xpcd lvl of inflaion, and h valu of a shar of sock is dpndn on h xpcd fuur incom from ha sock and by h fdral funds ra. As such, an agn has raional xpcaions for h spo xchang ra k- priods from now,, if h following condiion holds: S k 7 S, hps://n.wikipdia.org/wiki/cobwb_modl 8 S, Muh [3]. 9 S, Cobwb modl, which xplains why prics migh b subjc o priodic flucuaions in crain yps of marks. I dscribs cyclical supply and dmand in a mark, whr h amoun producd mus b chosn bfor prics ar obsrvd. Producrs xpcaions abou prics ar assumd o b basd on obsrvaions of prvious prics. And by h powr of h labor unions, which has vanishd, laly, du o globalizaion, drgulaion, illgal migraion, indbdnss, and hn, by h prssur from h capial mark (crdiors).

7 Exchang Ra Expcaions 7 E S k E Sk I ) ( () whr, E = agn s subjciv (prsonal) xpcaion formd in priod S k rgarding h valu of S in priod k wih ( k ), I = h informaion s availabl o h agn in priod, E S I ) = h objciv ru xpcaion ( k This informaion I is incompl and conrolld by h world plannrs (dark powrs) hrough h fak nws. Th ru informaion is (πληροφορίαι) and I. Thr ar vry fw popl ha hav full informaion ( ), hy know h absolu TRUTH; bu hy canno mak i public bcaus h mdia and all publicaions ar in h hands of h big liar (h dcivr of h world). Unforunaly, his is almos impossibl bcaus h public is dlibraly misinformd. Thr is no fr spch anymor. W liv in h Ag of Dcpion (Davidson [5]) and our informaion is from h conrolld mdia. Th conrolld and subjciv mass mdia hav conribud o hs problms, h big lis. John Swinon, h formr Chif of Saff a h Nw York Tims was askd o giv a oas bfor h prsigious Nw York Prss Club in 953. H mad his candid confssion ha hr is no indpndn prss. [I s worh noing ha Swinon was calld Th Dan of His Profssion by ohr nwsmn, who admird him graly]. H said, Thr is no such hing, a his da of h world s hisory, in Amrica, as an indpndn prss. You know i and I know i. Thr is no on of you who dars o wri your hons opinions, and if you did, you know bforhand ha i would nvr appar in prin. I am paid wkly for kping my hons opinion ou of h papr I am conncd wih. Ohrs of you ar paid similar salaris for similar hings, and any of you who would b so foolish as o wri hons opinions would b ou on h srs looking for anohr job. If I allowd my hons opinions o appar in on issu of my papr, bfor wnyfour hours my occupaion would b gon. Th businss of h journaliss is o dsroy h ruh, o li ourigh, o prvr, o vilify, o fawn a h f of mammon, and o sll his counry and his rac for his daily brad. You know i and I know i, and wha folly is his oasing an indpndn prss? W ar h ools and vassals of rich mn [dark powrs] bhind h scns. W ar h jumping jacks, hy pull h srings and w danc. Our alns, our possibiliis and our livs ar all h propry of ohr mn. W ar inllcual prosius. (John Swinon, as h formr Chif of Saff a h Nw York Tims, bfor h Nw York Prss Club in 953). Furhrmor, h ohr sid ( h rulrs ) said, W ar graful o h Washingon Pos, h Nw York Tims, Tim Magazin and ohr gra publicaions whos dircors hav andd our mings and rspcd hir promiss of discrion for almos 4 yars...i would hav bn impossibl for us o dvlop our plan for h world if w had bn subjcd o h lighs of publiciy during hos yars. Bu, h world is mor sophisicad and prpard o march owards a world govrnmn. Th suprnaional sovrigny of an inllcual li and world bankrs is surly prfrabl o h naional auo-drminaion pracicd in pas cnuris. (This frighful quo is from an xrm globalis, David Rockfllr). S, hp:// David Rockfllr passd away on March, 7 a h ag of yars old and h conrolld mdia praisd him as h gras philanhropis of our ims. S, hps:// S, also h ohr sid, hps://hfullroninformr.com/h-dah-of-on-of-h-mos-vil-mn-in-our-lifim-davidrockfllr-nrs-h-gas-of-hll-afr--yars/ W saw h subjciviy of h conrolld mdia during h 6 U.S. lcions. Thy wr and coninu o b agains Donald Trump bcaus h is agains globalizaion and wr supporing Hilary Clinon, who is a pupp of h dark powrs (h dp sa ). Th dark powrs ar working sinc 64 o conrol h uninformd masss (Goyim) and hy succdd as w s oday. S, Kallianiois [3]. Furhr, Journalism

8 8 Ioannis N. Kallianiois for S k condiional on E ( ). I I, and I follows from q. () ha = a forcasing rror saisfying h condiion E S k Sk () Furhr, raional xpcaions horis wr dvlopd in rspons o prcivd flaws in horis basd on adapiv xpcaions whrby, xpcaions of h fuur valu of an conomic variabl ar basd on pas valus. For xampl, popl would b assumd o prdic inflaion by looking a inflaion las yar and in prvious yars. Undr adapiv xpcaions, if h conomy suffrs from consanly rising inflaion ras (prhaps, du o xpansionary monary policy or lack of govrnmn policis and compiion or h las imposiion of monopolis), popl would b assumd o always undrsima inflaion. This may b rgardd as unralisic; surly, raional individuals would soonr or lar raliz h rnd and ak i ino accoun in forming hir xpcaions. 3 in Amrica is dad. (San Hanniy, Fox Nws, April 6, 7). W ar in big roubl and h siuaion bcoms wors vry day. Ὁ Θεός νά μᾶς λυπηθῇ καί νά μᾶς ἐλεήσῃ. Also, Th ida ha marks work prfcly is no longr nabl, Richard Thalr said in a 5 inrviw wih h Nwshour. S, Kallianiois [4]. 3 Evn hough ha h official inflaion is downgradd by h auhoriis. Th U.S. official inflaion wih July 7 was (.6% p.a.) and h SGS giv ( 9.8% p.a.). This misinformaion of h popl is complly unhical, irraional, and ani-scinific. S, hp:// and hir wo Graphs bllow:

9 Exchang Ra Expcaions 9 Th hypohsis of raional xpcaions addrsss h criicism on adapiv xpcaions by assuming ha individuals ak all availabl informaion ino accoun in forming xpcaions. Though xpcaions may urn ou incorrc, hy will no dvia sysmaically from h xpcd valus. Sourc: hp://

10 Ioannis N. Kallianiois Th raional xpcaions hypohsis has bn usd o suppor som radical conclusions abou conomic policymaking. An xampl is h Policy Inffcivnss Proposiion 4 dvlopd by Thomas Sargn and Nil Wallac [33], [34]. If h Fdral Rsrv amps o lowr unmploymn hrough xpansionary monary policy, conomic agns will anicipa h ffcs of h chang of policy and rais hir xpcaions of fuur inflaion accordingly (Phillips curv). 5 This, in urn, will counrac h xpansionary ffc of h incrasd mony supply. All ha h Fd can do is rais h inflaion ra, no mploymn and hy manipula h way ha w masur inflaion. This is h rason ha h QE (asy monary policy) during h las global conomic crisis was complly inffciv. This is a disincly Nw Classical oucom. During h 97s raional xpcaions appard o hav mad prvious macroconomic hory largly obsol, which culminad wih h Lucas [6] criiqu (arguing ha i is naïv o ry o prdic h ffcs of a chang in conomic policy nirly on h basis of rlaionships obsrvd in hisorical daa, spcially highly aggrgad hisorical daa). Howvr, raional xpcaions hory has bn widly adopd hroughou modrn macroconomics, as a modling assumpion from h work of Nw Kynsians. Furhrmor, raional xpcaions hory is h basis for h fficin mark hypohsis (fficin mark hory). If a scuriy s pric dos no rflc all h informaion abou i, hn hr xiss unxploid profi opporuniis : somon can buy (or sll) h scuriy o mak a profi; hus, driving h pric oward quilibrium. This prson has suprior (insidr) informaion or h is a financial mark manipulaor. In h srongs vrsions of hs horis, whr all profi opporuniis hav bn xploid, all prics in financial marks ar corrc and rflc mark fundamnals (such as fuur srams of profis and dividnds). Each financial invsmn is as good as any ohr, whil a scuriy s pric rflcs all informaion abou is inrinsic valu. 6.5 Rgrssiv Expcaions Rgrssiv xpcaions play a crucial rol in h ovrshooing modl of Dornbusch [7] and can b racd back o Kyns [3], who suggsd ha financial marks xpc inrs ras o rgrss o a normal lvl. Agns ar characrizd by rgrssiv xpcaions if hy xpc h fuur spo ra ( s ) o mov in h dircion of som fundamnal or long run quilibrium valu ( s ). 4 Th policy-inffcivnss proposiion (PIP) is a nw classical hory proposd in 975 by Thomas J. Sargn and Nil Wallac basd upon h hory of raional xpcaions, which posis ha monary policy canno sysmaically manag h lvls of oupu and mploymn in h conomy. 5 N Phillips curv: ( u u ), whr = inflaion ra and u = unmploymn ra. 6 For fficincy in h forign xchang mark, s Kallianiois [] and [5].

11 Exchang Ra Expcaions s ( ) s s (3) whr, = a consan ( ) and s = h long run quilibrium xchang ra. Th xpcaions ar assumd o b formd rgrssivly sinc xchang ras in h long run rgrss oward h long run quilibrium xchang ra s. Eq. (3) can b wrin as follows: s ( s s ) (4) This quaion [q. (4)] says ha if h spo ra is blow h long run quilibrium ra, i is xpcd o climb and vic vrsa. Thus, h spo ra nds o convrg o h long run quilibrium ra. This long run quilibrium ra dos no hav o b saionary and i is id o PPP. Combining q. (4), h xrapolaiv xpcaions, and q. (4), h rgrssiv xpcaions, w rciv h following quaion: s ( s s ) ( s s ) (5) Th firs rm of h abov quaion (xrapolaiv componn) indicas a ndncy for currn spo ra dprciaion or apprciaion o lad o a furhr dprciaion or apprciaion in h nar fuur (shor-run), which capurs h immdia mark rnd. This componn can conribu o xchang ra ovrshooing and dsabilizaion of h xchang ra. Th scond rm of h quaion (rgrssiv componn) rcommnds ha h currn spo ra will mov owards is long run quilibrium valu, du o changs in fundamnals; hus, i will b convrgnc and will sabiliz a his nw lvl. 3 Gnral Spcificaion of Alrnaiv Expcaions Modls Th formaion of diffrn xpcaions (anicipaions, hops, and bhaviors) dpnds on h availabl informaion and on h dgr of knowldg of xchang ra drminaion. Assuming spo mark fficincy, h fiv xpcaion formaions ha wr dscribd abov can b viwd as a paricular form of dviaion from h random walk hypohsis [q. (6)]. s s (6) Th xpcaions quaion can b wrin as follows:

12 Ioannis N. Kallianiois s s x (7) whr, x = an addiional informaion s o q. (6), h random walk. Considring, now h ralizd (acual) valu of h xpcd spo ra o sima q. (7), i can b wrin, s s x (8) whr, s = h ralizd valu of h spo ra nx priod, s = h ln of h spo xchang ra, = a (k x ) vcor of unknown paramrs, x = h ( x k) row vcor, and = h rror rm. Basd on q. (8), alrnaiv xpcaion modls can b sd. A saic xpcaion has an x. In xrapolaiv xpcaions, w hav x s s ). ( In adapiv xpcaions, i is x s s ). In raional xpcaions x, oo. ( ( s s In rgrssiv xpcaions, i is x ). And finally, h random walk, h x. Ohr s ha can b don ar h unbiasd forward ra hypohsis, whr x f s ) ; h uncovrd inrs pariy wih x ( i i ) ; and h ( uncovrd inrs arbirag, x [( i i ) d], whr, d = a risk-rlad dviaion from prfc subsiuabiliy. 4 Orhogonaliy Tss Many vidncs confirm h hypohsis of h forward xchang mark fficincy, bu som rcn sudis hav found his hypohsis o b qui wak. 7 To s whhr addiional informaion can b usd o inrpr h forcas rror, rsarchrs conduc a s calld orhogonaliy s, 8 which is as follows: s f x (9) whr, s = h acual spo xchang ra nx priod, f = h forward ra, x = h ( x k) row vcor, = a (k x ) vcor of unknown paramrs, and = h rror rm. 7 S, Kallianiois [5]. 8 S, Sarno and Taylor [35].

13 Exchang Ra Expcaions 3 Th orhogonaliy s of f as an opimal prdicor of s is dsignd o drmin whhr h forcas rror is corrlad o som subs of h currn informaion s I, h row vcor x, hr. Consqunly, sing h null hypohsis ha involvs sing whhr any lmns of x ar saisically significan. Th rjcion of h null hypohsis lads o diffrn conomic inrpraions, dpnding on h lmns ha ar includd in h vcor x. () To xplain h forcas rror in q. (9) many alrnaiv hypohss and approachs hav bn usd (lik, h nws, c.). In his cas, w can rwri q. (9) as follows: s f () ( V V ) ( V V ) whr, x {( V V ), ( V V )}, V and V = appropria xognous variabls xplaining h xchang ra (i.., variabls from h monary approach). () An alrnaiv approach xamining h issu of a risk prmium is h inspcion of srial corrlaion of h forcas rror by aking x as a funcion of laggd forcas rrors from boh counris, x {( s f ), ( s f )} () j j j j Sinc h simpl fficin mark hypohsis (unbiasdnss of h forward ra) implis ha h s f is uncorrlad o x, h rjcion of h null hypohsis ha implis h rjcion of h fficin mark hypohsis. (3) Anohr mhod is o sablish a rlaionship bwn xchang risk prmia and h masur of risk (from som financial variabls). Som rsarchrs 9 rla h ralizd rurns in h forign xchang marks o h nominal inrs ras in boh counris, as follows: s s ( i i ) i i () whr, [ s ( i i ) f ] = h covrd inrs ra pariy condiion,, and. 9 S, Giovannini and Jorion [].

14 4 Ioannis N. Kallianiois Ohr rsarchrs hav linkd h risk prmia in forign xchang marks o h risk prmia in h sock marks ( rp ): m s s ( i i ) ( Rm, i ) ( Rm, i ) (3) whr, [( Rm, i ) rpm, ] = h xpcd mark risk prmium in h domsic quiy mark condiional on I, [( R i ) rp ] = h xpcd risk m, m, prmium in h forign sock mark condiional on I,, and. Th confirmaion of h abov ss of hypohsis validas h argumn for h xisnc of a risk prmium in h forign xchang marks. 5 Empirical Rsuls Th daa ar monhly and ar coming from Economagic.com, Eurosa, and Bloombrg. For h uro ( ), h daa ar from 999: o 7: and for h ohr four currncis ($,, C$, and ) from 97: o 7:. Ohr daa usd, hr, ar T-Bill ras, mony supplis, incoms, pric lvls, and sock mark indxs. An mpirical s of fficincy is a join s of fficincy (full informaion) and h quilibrium (harmony) modl. By quilibrium, w man an inrnal, xrnal, rnal, and global balanc ha mus xis in marks and sociis bcaus w (vry individual) mus b in balanc and liv in harmony wih ourslvs, h ohrs, and h nir socio-conomic nvironmn; ohrwis, how can hr b an quilibrium? Rcn ss conducd by Kallianiois [7] show ha h vidnc supporing h unbiasd forward ra hypohsis is qui wak. H found ha a non-consisn risk prmium is prsn in svral major forign xchang marks ($/, $/, and /$). Th implicaion of hs mpirical findings is ha on canno us h forward ra dircly as a masur for h fuur spo ra bcaus hr ar many inrvnions in h forign xchang mark and many surpriss (financial shocks) imposd by h world plannrs. 5. Exrapolaiv Expcaions W run q. (5) o drmin and h rsuls appard in Tabl a. Th rgrssions giv: for $/,.94 ; for $/,.34 ; for C$/$,.78 ; and for /$.38. Thn, h xpcaions mov h sam dircion, as in h pas ( s ) for h four xchang ras. s S, Chiang [3]. S, Kallianiois [3] and [6].

15 Exchang Ra Expcaions 5 Tabl a: Exrapolaiv Expcaions, Eq. (5) s s ; if xpcaions mov h sam dircion and if h opposi dircion ( s s ( s s ) and ( s s ( s s ) R SSR F D W N $/ (.67) $/ (.) (.67) $/ (.4) $/ (.) (.4) C$/$ (.4) C$/$ (.)(.4) /$ (.4) /$ (.) (.4) No: R = R-squard, SSR = sum of squard rsiduals, F = F-Saisic, D W = Durbin-Wason Saisic, N = numbr of obsrvaions, = significan a h % lvl, = significan a h 5% lvl, and = significan a h % lvl. Sourc: Economagic.com, Bloombrg, and Eurosa. Running h sam quaion [q. (5)] wih consan rm, w hav h sam rsuls; h s (saisically insignifican) and h s vry similar as in h prvious rgrssions wihou consan rm. Thus, h xpcaions mov h sam dircion. Now, w run q. (7) and h rsuls ar shown in Tabl b. For $/,.97 ; for $/,.34 ; for C$/$,.79 ; and for /$,.34. Th ngaiv s ll us ha h xpcaions mov h opposi dircion. Again, running h q. (7) wih consan rms giv h sam rsuls as

16 6 Ioannis N. Kallianiois bfor ( ). Thus, h xpcaions mov h opposi dircion ( s s ). s Tabl b: Exrapolaiv Expcaions, Eq. (7) s ( ) s s and s ( ) s s ; if xpcaions mov h sam dircion and if h opposi dircion R SSR F D W N $/ (.67) (.67) $/ , (.3)(.67) (.67) $/ (.4) (.4) $/ , (.3)(.4) (.4) C$/$ (.4) (.4) C$/$ , (.)(.4) (.4) /$ (.4) (.4) /$ , (.3) (.4) (.4) No: S, Tabl a. Sourc: S, Tabl a. 5. Adapiv Expcaions Th forcasing of h s is aking plac wih an ARMA(, ) procss, which givs vry good rsuls and hy ar prsnd in Tabl a. By using h forcasing ŝ from h ARMA (, ) quaions, w run Eq. (8), which is shown in Tabl b. Th rsuls ar: for $/,.85 ; for $/,.384 ; for C$/$,.73 ; and for /$,.338. Th sam rgrssions wih a consan rm giv similar rsuls as h quaions wihou consan rm. For $/,.97 and

17 Exchang Ra Expcaions 7.78 [ (.97).97] ; for $/,.395 and.38 ; for C$/$,.79 and.69 ; and for /$,.339 and.333. Th cofficin s (cam ou ngaiv) ha mans h spo ras had bn lowr han hy wr xpcd and popl rvis hir xpcaions downward for h fuur. Tabl a: Forcasing of ŝ ARMA (,) : s s R SSR F D W N $/ , (.96)(.3) (.6) RMSE =.57 $/ , (.8) (.7) (.35) RMSE =.8 C$/$ , (.74) (.6) (.3) RMSE =.569 /$ , (.4) (.3) (.35) RMSE =.534 No: S, Tabl a. Sourc: S, Tabl a. Lasly, by using h forcasing ŝ, w run q. () and h rsuls appard in Tabl c. Now, all h s (ar posiiv); h spo ras had bn highr han xpcd and popl rvis hir xpcaions upward for h fuur.

18 8 Ioannis N. Kallianiois Tabl b: Adapiv Expcaions, Eq. (8) s ( ) s s and s ( ) s s R SSR F D W N $/ (.68) (.69) $/ , (.3)(.68) (.7) $/ (.43) (.43) $/ , (.3) (.43) (.43) C$/$ (.43) (.43) C$/$ , (.) (.43) (.43) /$ (.43) (.43) /$ , (.3) (.43) (.43) No: S, Tabl a. Sourc: S, Tabl a. 5.3 Raional Expcaions Furhr, w s raional xpcaions quaion, q. (), and i is shown in Tabl 3. To forcas h ŝ, w us h ARMA(, ) procss, as w did in h prvious qs. (8) and (). Th rsuls show: For $/,.5 and.969 ; hn, sˆ s and h xpcaions ar no raional. For $/,.9 and.986 ; hus, sˆ s and xpcaions ar no raional for his xchang ra, oo. Now, for C$/$,. and.989 ; hn, sˆ s and xpcaions for his xchang ra ar raional. Th sam holds for /$,. and.999 ; so, sˆ s and xpcaions ar raional, hr.

19 Exchang Ra Expcaions 9 Tabl c: Adapiv Expcaions, Eq. () s s ( s s ) R SSR F D W N $/ (.34) $/ (.8) C$/$ (.39) /$ (.3) No: S, Tabl a. Sourc: S, Tabl a. 5.4 Rgrssiv Expcaions W sar simaing h long run quilibrium of h xchang ra, s, by using h monary approach and h rsuls of hs rgrssions appard in Tabl 4a. Thn, h rgrssiv xpcaions, q. (3), ar sd and Tabl 4b givs h rsuls. For $/,. 37(insignifican), hn h fuur spo ra ( s ) dos no mov o is long run quilibrium valu ( s ), so agns ar no characrizd by rgrssiv xpcaions. For $/,.6, which shows ha h fuur spo ra ( s ) movs o is long run quilibrium valu ( s ). For C$/$,.4, hn h fuur spo ra ( s ) movs in h dircion of som fundamnal ( s ). For /$,.5 ha shows h fuur spo ra ( s ) movs o is long run quilibrium valu (o som fundamnals s ). Thus, for h hr xchang ras ($/, C$/$, and /$), agns ar characrizd by rgrssiv xpcaions.

20 Ioannis N. Kallianiois Tabl 3: Raional Expcaions, Eq. () sˆ s ; if R SSR F D W N $/ , (.3) (.) $/ , (.3) (.6) C$/$ , (.) (.5) /$ , (.3) (.3) No: S, Tabl a. Sourc: S, Tabl a. Now, w run q. (4) wih a consan and h rsuls ar prsnd in Tabl 4c. For $/,. 99; for $/,. 63; and for /$,. 75 (insignificans), which shows ha hs hr xchang ras do no chang o rach hir long run quilibria. For C$/$,.43, which lls us ha his spo ra is blow h long run quilibrium ra and i is xpcd o climb. Thn, q. (5) givs h rsuls (xrapolaiv and rgrssiv componns) ha ar shown in Tabl 4d. For $/,.83 (xrapolaiv componn) ha shows h currn spo ra will apprcia in h shor run;. 46(rgrssiv componn) rvals ha h currn spo ra will no mov o a long run quilibrium valu (fundamnals do no affc i). For h ohr hr xchang ras: ($/,.576,.373 ), (C$/$,.37,.333 ), and ( /$,.47,.97 ), w s a ndncy for h currn spo ras o apprcia ( s ) in h nar fuur (shor-run). Thy migh ovrshoo. Thir scond rms ( ) rcommnd ha h currn spo ras will mov owards s This is an indicaion of wak ffcs from fundamnals, du o globalizaion (ousourcing). Th U.S. and Euro-zon hav los hir manufacuring; i wn o Asia. Ths wo conomis ry o surviv wih h srvic scor (wih falshood), financial marks and srvics in gnral, which is impossibl. Th wsrn conomis ar undr collaps, afr so many yars of xploiaion and conrol of hir facors of producion; spcially, h facor labor (wih minimum wags wihou halh car and ohr bnfis) and h facor land (wih h normous propry axs). (sic).

21 Exchang Ra Expcaions Tabl 4a: Forcasing h Long Run s by Using h Monary Approach s ( m m ) ( y y ) 3 ( i i ) Variabls s ($/ ) s ($/ ) s (C$/$) s ( /$) c (.73) (.49) (.68) (.8) m m (.345) (.89) (.6) (.4) y y (.349) (.7) (.6) (.7) i i (.) (.4) (.) (.8) (.9) (.58) (.34) (.64) (.66) (.8) (.49) (.97) (.74) (.9) (.67) (.) (.93) (.89) (.66) (.) (.73) (.79) (.55) (.7) (.) (.59) (.36) (.65) R SSR F , D W N No: S, Tabl ; m = ln of mony supply, an asrisk ( ) on a variabl dnos h forign variabl. Sourc: S, Tabl. y = ln of incom, i = shor-rm inrs ra, and

22 Ioannis N. Kallianiois Tabl 4b: Rgrssiv Expcaions, Eq. (3) s ( ) s s R SSR F D W N $/ , (.3) (.86) (.93) $/ , (.8) (.6) (.66) C$/$ , (.) (.47) (.49) /$ , (.6) (.6) (.67) No: S, Tabl a. Sourc: S, Tabl a. Tabl 4c: Rgrssiv Expcaions, Eq. (4) ( s s ) ( s s ) R SSR F D W N $/ (.3) (.84) $/ (. (.58) C$/$ (.) (.45) /$ (.) (.6) No: S, Tabl a. Sourc: S, Tabl a.

23 Exchang Ra Expcaions 3 hir long run quilibrium valus (du o changs in hir fundamnals). Thus, xrapolaiv and rgrssiv xpcaions will ak plac. Tabl 4d: Rgrssiv Expcaions, Eq. (5) ( s s ) ( s s ) ( s s ) R SSR F D W N $/ (.) (.34) (.3) $/ (. (.78) (.8) C$/$ (.) (.54) (.5) /$ (.) (.79) (.76) No: S, Tabl a. Sourc: S, Tabl a. 5.5 Gnral Spcificaions of Expcaions Now, w s h random walk hypohsis, q. (6) and is rsuls ar givn in Tabl 5a. This is a s of saic xpcaions, oo. For $/ and $/ h random walk holds, bu for C$/$ and /$ h consan rms ar significan diffrn han zro, which shows ha h random walk dos no hold for hs wo xchang ras. Thn, w run q. (8) by aking as x f s (addiional informaion), h unbiasd forward ra hypohsis, which is shown in Tabl 5b. For h four xchang ras hir s ar posiiv and saisically significan a h % lvl. Thus, h forward discouns of las priod giv addiional informaion o drmin h fuur (h unbiasd forward ra hypohsis holds). s

24 4 Ioannis N. Kallianiois Tabl 5a: Random Walk, Eq. (6) s s ; if and R SSR F D W N $/ , (.3) (.) $/ , (.3 (.6) C$/$ , (.) (.5) /$ , (.4) (.3) No: S, Tabl a. Sourc: S, Tabl a. Tabl 5b: Th Unbiasd Forward Ra Hypohsis, Eq. (8) ( s s ) ( f s ) R SSR F D W N $/ (.) (.3) $/ (. (.65) C$/$ (.) (.74) /$ (.) (.65) No: S, Tabl a. Sourc: S, Tabl a.

25 Exchang Ra Expcaions 5 m by Using h Dmand for Mony, m p y 3 i Tabl 6a: Forcasing h Variabls m ($) m ( ) m ( ) m (C$) m ( ) c (.356) (.68) (.896) (.45) (.869) p (.43) (.8) (.6) (.87) (.39) y (.58) (.43) (.9) (.88) (.5) i (.) (.) (.) (.3) (.) m (.) (.39) (.9) (.6) (.4) (.58) (.68) (.9) (.85) (.6) (.69) (.99) (.37) (.4) (.78) (.73) (.) (.9) (.) (.89) (.6) (.3) (.3) (.96) (.) (.) (.83) R SSR F 46,78.7, ,69.8, ,73. D W N RMSE No: S, Tabl ; m = ln of mony supply, an asrisk ( ) on a variabl dnos h forign variabl. Sourc: S, Tabl. y = ln of incom, i = shor-rm inrs ra, and

26 6 Ioannis N. Kallianiois 5.6 Orhogonaliy Tss W sar simaing a variabl V m and as forcasing of V m, w us h dmand for mony quaion, which is rpord in Tabl 6a. By using hs rgrssions, w run q. () and is rsuls ar in Tabl 6b. For $/, h domsic nws (.75 ) hav significan ffc on ( s f ); for $/, h nws hav no significan ffc on ( s f ); for h C$/$, h domsic and Canadian nws (.456,.39 ) hav significan ffcs on ( s ); and for h /$ xchang ra, only h Japans nws (.57 f ) hav significan ffc on h ( s f ). Thn, w run q. () and h oucom is prsnd in Tabl 6c. Th rsuls show, hr, ha h nominal inrs ras hav significan ffcs on h rp s s ( i i ). Th nx quaion is q. (3) and is rsuls ar shown in Tabl 6d. I is rvald ha h xpcd risk prmia in h domsic quiy marks hav significan ngaiv ffc [ rp m s f ($ ) ], xcp for /$ ra, which is insignifican and h xpcd risk prmia in h forign quiy marks hav significan posiiv ffc on h covrd inrs ra pariy [ rp m Tabl 6b: Th Forward Exchang Mark Efficincy, h Nws, Eq. () ( s f ) ( m m ) ( m m ) R SSR F D W N $/ (.3) (.353) (.46) $/ (. (.89) (.8) C$/$ (.) (.8) (.3) /$ (.) (.4) (.69) No: S, Tabl a. Sourc: S, Tabl a.

27 Exchang Ra Expcaions 7 Tabl 6c: Th Exchang Risk Prmium and h Nominal Inrs Ras, Eq. () s s ( i i ) i i R SSR F D W N $/ , (.3) (.4) (.4) $/ ,983, (.) (.) (.) C$/$ ,83, (.) (.) (.) /$ , (.) (.) (.4) No: S, Tabl a. Sourc: S, Tabl a. Tabl 6d: Th Exchang Risk Prmium and h Risk Prmium in h Sock Mark, Eq. (3) s s i i ) ( R i ) ( R i ( m m ) R SSR F D W N $/ , (.3) (.4) (.4) $/ ,983, (.) (.) (.) C$/$ ,83, (.) (.) (.) /$ , (.) (.) (.4) No: S, Tabl a. Sourc: S, Tabl a.

28 8 Ioannis N. Kallianiois dviaion bwn h acual spo and h forward ra ( s f ) ($ and,, C$, and )]. Thus, h forign rp ar som addiional informaion o m forcas h rror of s f ) (. 6 Policy Implicaions Macroconomic announcmns play an imporan rol in updaing policymakrs and public s assssmn of h U.S. conomy; so xpcaions on movmns of xchang ras ar also affcd by hs nws. 3 Th conduc of monary policy changd subsanially in h afrmah of h global financial crisis. Fd s h fdral funds ra a nar zro ( i FF.5% ), h zro lowr bound (ZLB) and monary policy samns abou h pah of inrs ras bcam mor xplicily linkd o h anicipad voluion of inflaion and unmploymn, 4 3 Unforunaly, h mdia ar complly conrolld and hir nws ar fak. As w s laly, hy hav mad up so much fak nws abou h bogus Russiaga conspiracy o forc Prsidn Trump o avoid o mak world pac wih Prsidn Puin. 4 Th ru unmploymn ra wih July 7 is.% (SGS) and no wha h BLS is rporing as h official on of 4.3% (hps://daa.bls.gov/imsris/lns4). Th ShadowSas Alrna Unmploymn Ra for July 7 is.%. Sourc: hp://

29 Exchang Ra Expcaions 9 known as forward guidanc. Th ZLB priod (Dcmbr 8-Dcmbr 5) 5 was vry diffrn from h prvious monary policy rgims in rms of h naur of Fd policy communicaion and policy sing islf. I brough h inroducion of unconvnional quaniaiv asing o simula h conomy. Ths nw ools includd quaniaiv asing (incrasing h mony supply by purchasing Trasuris and morgag-backd scuriis) and h mauriy-xnsion program (wih h Fd shifing is balanc sh holdings of Trasuris o longrrm db). 6 For xampl, on April 3, 5, an unmploymn rpor illusrad a racion o disappoining nws (ngaiv surpris). Th samn rpord ha in March 5, h conomy addd 6, jobs; sharply lowr han h xpcd 45, jobs, a ngaiv surpris of 9, jobs. This dvlopmn ld o an incras in Trasury no fuurs prics and a dclin in hir implid inrs ras, as wll as a dprciaion of h U.S. dollar wihin a vry igh im inrval around h announcmn. Ths pric rsponss illusra h racion of inrs and xchang ras o mploymn rpor surpriss ( nws ). 7 Th xchang ra should b insulad agains h impac of shocks o xpcaions ovr fuur produciviy. This is bcaus, wih sicky nominal goods prics, xchang ra movmns affc rlaiv prics, and in h modls w analyz, fficin rlaiv prics ar indpndn of fuur produciviy. Th modls, as formulad, mak an assumpion of compl marks. Whn mark ar incompl, nws shocks may gnra walh ffcs ha alr currn rlaiv prics, vn whn all nominal prics ar fully flxibl. This maks h opimal policy rspons o nws shocks lss clar. Bu i is sill no slf-vidn ha undr a policy ha ignors nws shocks, h xchang ra will mov in a mannr consisn wih fficin adjusmn. Exprinc wih floaing xchang ras has shown us ha xpcaions can lad o larg and prolongd swings in xchang ras ha do no corrspond o any currn changs in ass or chnology. Indd, ass marks may b corrcly pricing h ffcs of fuur changs in fundamnals, bu h rsuling allocaions sill ar no fficin. Exchang ras canno simulanously 5 S, hps://frd.slouisfd.org/sris/fedfunds 6 Kallianiois [4]. 7 Koch and Yung ([4], Char 4, p. 4) giv a char, whr hy show h Dollar/Euro Fuurs snsiiviy o U.S. Nws (macroconomic surpriss). Firs, high snsiiviy for h $/ Fuurs xiss for h following nws. Housing: Exising-hom sals, Iniial joblss claims, Nonfarm payrolls, Ral GDP growh: advanc, Ral GDP growh: scond, Prsonal spnding, Consumr confidnc, and ISM manufacuring indx. Thn, lss snsiiviy xiss for h $/ Fuurs prics o h following macroconomic surpriss. Housing: housing prmis, Housing: housing sars, Housing: nw-hom sals, Ral GDP growh: final, Inflaion: CPI, Inflaion: PPI, Prsonal incom, Rail sals, Consumr snimn: prliminary, Consumr snimn: final, Indusrial producion, Durabl goods ordrs, and Facory ordrs.

30 3 Ioannis N. Kallianiois achiv h ass mark quilibrium ha rflcs nws abou h fuur rlaiv valus of currncis and h goods mark quilibrium ha rflcs fficin rlaiv prics. Wih h ousourcing afr 98s (loss of agriculur and manufacur), h surpriss ar only monary shocks ha caus ovrshooing (xrapolaiv componns) o h xchang ras. Thir long run quilibria (rgrssiv componns) hav bcom wak. Unforunaly, w sn all h jobs o China, India, and h ohr dvloping counris and w ry o improv h conomy wih zro inrs ras (ZLB), which dos no work. I causs only nw bubbls, 8 nw criss, lasing rcssions, and hy (h policy makrs) ry o li o popl by changing h way ha hy masur unmploymn, inflaion, and growh. Thn, popl hav los hir russ for h policymakrs and hir xpcaions ar basd on h ngaiv nws, which ar many and affc h xchang ras and h ohr mark prics. Th zro dposis ras hav forcd popl o undrak, wihou hir will, h high risk ha h invsmn in financial marks gnra. Individuals canno rus h risky financial marks afr h global financial crisis of 7 and h normous losss ha hy xprincd. Popl hav los confidnc o Fd 9 and 8 Th nw financial bubbl is vry dangrous (DJIA form 6,547.5 on March 9, 9 rachd 3,434.9 on Ocobr 7, 7). A growh of 6,887.4 poin, 57.94% or 3.5% pr annum and h bubbl is growing. Prsidn Trump could fac a oal mldown of h U.S. conomy and hn, a global financial and ral crisis will ak plac, for which h financial manipulaors ar currnly working. Th U.S. Fd (Jan Ylln) is rsponsibl for his forhcoming caasroph by kping h fdral funds ra closd o zro sinc Dcmbr 8. On Ocobr 3, 7, h ffciv fdral funds ra was.6% and h arg fdral funds ra was (.%-.5%). S, hp:// ACXQgUz%3a7645%3as. S also, hps://frd.slouisfd.org/sris/fedfunds. Our cnral banks and all h inrnaional insiuions ar in a srious disarray, as vicims of globalizaion. Of cours, h ulima conrollr of h world is God!.. Evn h Nobl Economis Thalr Says H s Nrvous Abou Sock Mark, hps:// -/nobl-conomis-halr-says-h-s-nrvous-abou-sock-mark 9 Th Fd lls visiors is basmn vaul holds h world s biggs official gold sash and valus i a $4 billion o $6 billion. Bu no on a all can b sur h gold is rally hr xcp Fd mploys wih accss Ohr horiss suspc h gold bnah h Nw York Fd s hadquarrs a 33 Libry S. may b gold-pad faks. S, Kay Burn, Fd Has 6, Tons of Gold in Nw York Basmn-Or Dos I?, Th Wall Sr Journal, Augus, 7, pp. A and A7. Also, Upon Srauss-Kahn raising his concrns wih Amrican govrnmn officials clos o Prsidn Obama h was conacd by rogu lmns wihin h Cnral Inllignc Agncy (CIA) who providd him firm vidnc ha all of h gold rpord o b hld by h US was gon. Posd on May 3, by Max Rad mor a hp:// wihin-h-cnral-inllignc/#zkvxwclcwhaiv.99

31 Exchang Ra Expcaions 3 o all h inrnaional insiuions for hir unxpcd shocks ha gnra wih hir suspicious ani-social policis, complmnd wih fak nws. 7 Conclusion I is difficul o masur mark xpcaions, bu hy can b proxid by financial insrumns (lik, h xchang ras) ha ar s o b radd in h fuur and, hus, incorpora mark xpcaions. Th rspons of -yar Trasury fuurs prics and currncy fuurs using inraday daa wihin a 5-minu symmric window around h xac im of h rlas of macroconomic nws capurs h mark s racion o h surpris. Forign xchang fuurs ar xprssd in U.S. dollars so ha an incras in h xchang ra indicas a dprciaion of h U.S. dollar rlaiv o a forign currncy. Th ral scor of h conomy ( Main Sr ) is vry imporan for vry naional conomy. Th long-run quilibrium valu of h xchang ras mus b drmind by h counris fundamnals and his is absn for h $/ xchang ra. Exchang ra fuurs nd o b rlaivly lss snsiiv o U.S. macroconomic nws. Th uro is much mor snsiiv o U.S. macroconomic surpriss bfor han afr h ZIB. Thr is mor snsiiviy o U.S. surpriss in Japan s and Canada s currncy rsponss pos-8. Boh mpirical vidnc and horical discussion hav long mphasizd h impac of nws on xchang ras. In mos xchang ra modls, h xchang ra acs as an ass pric, and as such rsponds o nws abou fuur rurns on asss. Howvr, h xchang ra also plays a rol in drmining h rlaiv pric of non-durabl goods whn nominal goods prics ar sicky. In his papr w invsigad h xchang ra xpcaions for four diffrn xchang ras ($/, $/, C$/$, and /$), which ar modls of xchang ra forcasing. W xamind h saic xpcaions, h xrapolaiv, h adapiv, h raional, h rgrssiv, som gnral spcificaions of hs xpcaions, and w prformd a fw orhogonaliy ss. If nws abou fuur ass rurns causs movmns in currn xchang ras; hn, whn nominal prics ar slow o adjus, his may caus changs in currn rlaiv goods prics ha hav no fficincy raional. In his sns, anicipaions of fuur shocks o fundamnals can caus currn xchang ra misalignmns. W oulin a sris of modls in which an opimal policy liminas h ffcs of nws on xchang ras. Expcaions affc xchang ras and ar vry snsiiv o macro-variabls (conomic fundamnals). By using h xrapolaiv xpcaions, h rsuls show ha agns xpcaions mov h sam dircion. Wih h adapiv xpcaions s, w s ha popl adjus hir xpcaions downward or upward basd on h pas-xpcd rnd. Expcaions ar no raional for h forcasing of $/ and $/ xchang ras, bu ar raional for C$/$ and /$. Rgrssiv xpcaions do no affc h $/ xchang ra,

32 3 Ioannis N. Kallianiois which mans ha his spo ra is no moving wih h conomic fundamnals in h U.S. and EMU. Th unbiasd forward ra hypohsis holds for h four xchang ras. In gnral, agns ar using xchang ra xpcaions mor or lss ffcivly o forcas xchang ras. Lasly, by using orhogonaliy ss, w hav a mixd ffc of nws on h risk prmium. Th U.S. and Briish nws hav no ffc on $/ ( s f ). Th nominal shor-rm inrs ras hav significan ffcs on h xchang ra risk prmia ( rp ). Th quiy marks risk prmia ( rp ) hav significan ffcs on h xchang ras risk prmia ( rp ). Thus, xpcaions dpnd on many indicaors, pas valus of spo and forward ras, conomic fundamnals, and on h financial marks movmns. Th currncy of a counry dpnds on is ral conomy and on is public policis, which affc posiivly h long-run conomic growh and h social wlfar of h ciizns (hir wllbing, i.., Amricans firs ). For his rason, h vidnc show ha h forign xchang mark fficincy is qui wak. m Rfrncs [] Ariz, Augusin C., Elias C. Grivoyiannis, Ioannis N. Kallianiois, and Valri Englandr, Th Tradiional Approach o Balanc of Paymns Adjusmn undr Flxibl Exchang Ras, in Balanc of Paymns Adjusmn, did by A. C. Ariz, T. H. Bonisis, I. N. Kallianiois, K. M. Kashibhala, and J. Malindros, Wspor, Conncicu: Grnwood Prss, (), [] Ariz, Augusin C. and John Malindros, Tsing h Purchasing Powr Pariy in h Non-Linar Sar Framwork: Nw Rsuls on Symmric and Asymmric Adjusmns, Th Inrnaional Journal of Financ, 3 (3), (), [3] Chiang, T., Inrnaional Ass Pricing and Equiy Mark Risks, Journal of Inrnaional Mony and Financ,, Spmbr (99), [4] David, Paul A., Jus How Mislading ar Official Exchang Ra Convrsions?, Th Economic Journal, 8 (37), (97), [5] Davidson, Jams Dal, h Ag of Dcpion: Dcoding h Truhs abou h U. S. Economy, Nw York: Sragic Invsmn, (5). [6] Dvrux, Michal B. and Charls Engl, Expcaions and Exchang Ra Policy NBER Working Papr No. 3, Issud in May 6, -34. [7] Dornbusch, Rudigr, Expcaions and Exchang Ra Dynamics, Journal of Poliical Economy, 84 (6), Dcmbr (976), 6-76.

33 Exchang Ra Expcaions 33 [8] Eiman, David K., Arhur I. Sonhill, and Michal H. Moff, Mulinaional Businss Financ, Thirnh Ediion, Parson, Nw York, (3). [9] Fama, Eugn F., Forward and Spo Exchang Ras, Journal of Monary Economics, 4 (3), (984), [] Fama, Eugn F., Efficin Capial Marks: A Rviw of Thory and Empirical Work, Journal of Financ, 5, May (97), [] Giovannini, A. and Philipp Jorion, Inrs Ras and Risk Prmia in h Sock Mark and in h Forign Exchang Mark, Journal of Inrnaional Mony and Financ, 6 (), March (987), 7-4. [] Kallianiois, I.N., Exchang Ra Movmn: Efficincy in h Forign Exchang Mark, Inrnaional Rsarch Journal of Applid Financ, Vol. VIII, Issu 4, April (7), hps://nbula.wsimg.com/ fbcf756b59bfbb?accssky Id=A B839ECDD54B&disposiion=&alloworigin= [3] Kallianiois, I.N., «Ἡ Τρέχουσα Ἑλληνική Κρίσις ἐστίν Ἔργον τῶν Δημιουργῶν τῶν Δυτικῶν Ἐπαναστάσεων τοῦ Παρελθόντος», Απολογητικά, Fbruary 9, (7), -7. hp://apologiikaa.blogspo.com.cy/7//i.hml [4] Kallianiois, I.N., Cnral Banks, Monary Policy, and hir Efficincy, (Chapr ) in Monary Policy: Prspcivs, Sragis and Challngs, Harri Ward (dior), Nova Scinc Publishrs, Nw York, 7. [5] Kallianiois, I.N., Tss of Efficincy in h Forign Exchang Mark, Inrnaional Journal of Economics and Financial Rsarch, Vol. 3, No., Ocobr (7), hp://arpgwb.com/pdf-fils/ijfr3()8-39.pdf [6] Kallianiois, I.N., «Ἐπαναστάσεις, Κρίσεις καί Ἑνώσεις», Chrisian Vivliografia, Dcmbr, (6), -6. hps://chrisianvivliografia.wordprss.com/6///%%bc%9%cf%8 %c%b%c%bd%c%b%cf%83%cf%84%c%ac%cf%83%c%b5%c%b 9%cf%8-%c%ba%cf%8%c%af%cf%83%c%b5%c%b9%cf%8- %c%ba%c%b%c%af- %%bc%9%c%bd%cf%8%cf%83%c%b5%c%b9%cf%8/ [7] Kallianiois, I.N., Facors Affcing h Exchang Ra Risk prmium, Journal of Applid Financ and Banking, Vol. 6, No. 6, (6), [8] Kallianiois, John N., Exchang Ras and Inrnaional Financial Economics: Hisory, Thoris, and Pracics, Palgrav MacMillan, Nw York, (3). [9] Kallianiois, John N., Inrnaional Financial Transacions and Exchang Ras: Trad, Invsmn, and Pariis, Palgrav MacMillan, Nw York, (3). [] Kallianiois, I.N., Th Gnraiv Moiv of Europan Union and is Las Sruggl for Survival, Inrnaional Journal of Businss and Commrc, Vol., No. 6, Fbruary (), -4. hp://