Scapegoattheoryandhypotheses Dataandempiricalmethodology Empiricalresults Conclusions Motivation Motivation TimevaryingparametersisakeyexplanationforthefailureofexchangeratemodelsMeeseandRogo ID: 163131
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Introduction Scapegoattheoryandhypotheses Dataandempiricalmethodology Empiricalresults Conclusions Motivation Motivation Time-varyingparametersisakeyexplanationforthefailureofexchangeratemodels(MeeseandRogo¤1983,1988). Instabilityintherelationshipbetweenexchangeratesandfundamentalsexpost(Rossi2006,SarnoandValente2008,CheungandChinn2001). Scapegoattheoryofexchangerates(BacchettaandvanWincoop2004,2009): highlyunstablerelationshipnotexplainedbyfrequentandlargechangesinstructuralparameters, evenwhenallowingforrationalityofagentsandBayesianlearning... ...butbyexpectationsaboutthesestructuralparameters. Fratzscher,SarnoandZinna ScapegoatTheoryofExchangeRates Introduction Scapegoattheoryandhypotheses Dataandempiricalmethodology Empiricalresults Conclusions Motivation Scapegoattheoryofexchangerates Limitedknowledgeofagents. theyhaveaccurateideaaboutstructuralparametersinlong-term, butsigni…cantuncertaintyovertheshort-tomedium-term. Ifcurrencymovementsovertheshort-tomedium-terminconsistentwiththeirpriors potentiallyduetounobservablefundamentals... ...orincorrectweighttofundamentals, rationaltosearchforscapegoat:assignadditionalweighttosomefundamental, usuallyonethatseemsoutofsyncwithlonger-termequilibrium. Fratzscher,SarnoandZinna ScapegoatTheoryofExchangeRates Introduction Scapegoattheoryandhypotheses Dataandempiricalmethodology Empiricalresults Conclusions Motivation Roleofscapegoats "TheFXmarketsometimesseemslikeaserialmonogamist.Itconcentratesononeissueatatime,buttheissueisreplacedfrequently....Butuncertaintiesarebeingresolved...Themarketmaymovebacktoanearlierlove..."(FT,November82010) Anecdotalevidencefor…nancialmarkets. Fundamentalismorelikelytobecomeascapegoat: thelargerthe(unexplained)exchangeratemovementand themorethisparticularfundamentalseemsoutoflinewithitslong-runequilibrium. Fratzscher,SarnoandZinna ScapegoatTheoryofExchangeRates Introduction Scapegoattheoryandhypotheses Dataandempiricalmethodology Empiricalresults Conclusions Motivation Approachofpaper Empiricaltestofscapegoattheoryofexchangerates. Noveldataonsurveysofmarketparticipantsofexchangeratescapegoats 6keyfundamentals. 12currencies(advancedandemergingeconomies). monthlysurveysfor10-yearperiod(2001-2009). DataonFXorder‡owasproxyforunobservables/liquiditytrade matchingtoscapegoatdata. Fratzscher,SarnoandZinna ScapegoatTheoryofExchangeRates Introduction Scapegoattheoryandhypotheses Dataandempiricalmethodology Empiricalresults Conclusions Motivation 2Hypotheses Hypothesis#1:Scapegoatmodeloutperformsbenchmarkmodels twobenchmarks(constantparameter;time-varyingparametermodels). strongsupportalongthreeperformancecriteria(goodness-of-…t,information,market-timingtest). robustness;andforall12currencies. Hypothesis#2:Determinantsofscapegoats theory:fundamentalbecomesscapegoatifsizeofdeviationfromequilibriumlargeandthereissizeableshocktounobservables. empirical:strongandrobustevidence,forallcurrencygroupsandforallmacroeconomicvariables. Fratzscher,SarnoandZinna ScapegoatTheoryofExchangeRates Introduction Scapegoattheoryandhypotheses Dataandempiricalmethodology Empiricalresults Conclusions Introduction Dst=ft((1�l)bt+lEtbt)+(1�l)bt+lTåi=1ft�Etbt�i�Et�1bt�ibt=bt�1+vtft=(f1,t,f2,t,...,fN,t)0vectorofmacro-fundamentals,bt=(b1,t,b2,t,...,bN,t)0vectorofstructuralparams,Etbt=(Etb1,t,Etb2,t,...,EtbN,t)0vectorofexpectedparams,vt=(v1,t,v2,t,...,vN,t)0vectorofi.i.d.shockstostructuralparams,btistheunobservable,andlthediscountfactor....sothattheimpactofftonDstis¶Dst ¶ft=(1�l)bt+lEtbt+lTåi=0ft�i¶Etbt�i ¶ft Fratzscher,SarnoandZinna ScapegoatTheoryofExchangeRates Introduction Scapegoattheoryandhypotheses Dataandempiricalmethodology Empiricalresults Conclusions Introduction Empiricalmodels OurempiricalcounterparttoBacchettaandvanWincoopis SCA:Dst=f0tbt+(ttft)0g+dxt+utbt=bt�1+vtwherettarethesurveys(orscapegoatparam),xtistheorder‡ow(orunobservable),andEbt=Ett. Thetwobenchmarkmodelsare CP:Dst=f0tb+utTVP:Dst=f0tbt+ut Fratzscher,SarnoandZinna ScapegoatTheoryofExchangeRates Introduction Scapegoattheoryandhypotheses Dataandempiricalmethodology Empiricalresults Conclusions Dataonscapegoatsandfundamentals Dataonorder‡ow Econometricmethodology Identifyingscapegoats NovelsurveydatabyConsensusEconomics 40-60FXmarketparticipants,mostlyassetmanagers,inmanydi¤erentlocationsglobally,littleturnover. relative:"rankthecurrentimportanceofarangeofdi¤erentfactorsindeterminingexchangeratemovements". quantitative:"onascalefrom0(noin‡uence)to10(verystrongin‡uence)". 30currenciesvis-a-visUSD(someEUR). sixkeymacrofactorsrelativethereferencecountry:short-terminterestrates,long-terminterestrates,growth,in‡ation,trade/currentaccount,andequity‡ows. monthlyonbroadersetofFXsurveys,surveysaboutFXscapegoatsevery3to6months. period2001-2009,focuson6advancedcountrycurrenciesand6EMEcurrencies. Fratzscher,SarnoandZinna ScapegoatTheoryofExchangeRates Introduction Scapegoattheoryandhypotheses Dataandempiricalmethodology Empiricalresults Conclusions Dataonscapegoatsandfundamentals Dataonorder‡ow Econometricmethodology Fundamentalsandexchangeratedata Matchmonthlyscapegoatdatawiththeactualmacroeconomicfundamentals. Toobtainmonthlydatafrequency,usetradebalanceinsteadofthecurrentaccount,andusequarterlyGDPgrowth…gures(IMFIFS). Actualmacrofundamentalscalculatedrelativetothoseofreferencecountry. Scalingofscapegoatvariables:meanandstandarddeviationidenticaltothoseofactualmacrovariable. Exchangeratedata:nominalbilateralexchangerate,de…nedasforeignpriceofthedomesticcurrency,changeoverpastmonth. Fratzscher,SarnoandZinna ScapegoatTheoryofExchangeRates Introduction Scapegoattheoryandhypotheses Dataandempiricalmethodology Empiricalresults Conclusions Dataonscapegoatsandfundamentals Dataonorder‡ow Econometricmethodology Exampleofscapegoatsurvey March2005 Fratzscher,SarnoandZinna ScapegoatTheoryofExchangeRates Introduction Scapegoattheoryandhypotheses Dataandempiricalmethodology Empiricalresults Conclusions Dataonscapegoatsandfundamentals Dataonorder‡ow Econometricmethodology Stylisedfactsaboutscapegoats Fratzscher,SarnoandZinna ScapegoatTheoryofExchangeRates Introduction Scapegoattheoryandhypotheses Dataandempiricalmethodology Empiricalresults Conclusions Dataonscapegoatsandfundamentals Dataonorder‡ow Econometricmethodology FortheCPmodelwesimplydrawthehyperparametersconditionalonthedata,assuminganindependentinverseGamma-Normalpriordistribution. ForTVPandSCAtherearetwosteps.First,wedrawahistoryofstates(b)conditionalonthehyperparams(Q,d,g)anddata([DsT,fT,xT,tT]),usingCarterandKohn(1994)simulationsmoother.Then,wedrawthehyperparamsconditionalonthestatesanddata. Thepriorsusedinthepaperaredi¤use,andtheirdistributionsarechosenforconveniencefollowinganumberofpapers(KimandNelson,1999;SargentandCogley,2001;Primiceri,2005). Weperform60,000replicationsofwhichthe…rst40,000areburned-in,andwesave1every10drawsofthelast20,000replications. Fratzscher,SarnoandZinna ScapegoatTheoryofExchangeRates Introduction Scapegoattheoryandhypotheses Dataandempiricalmethodology Empiricalresults Conclusions Scapegoatmodelestimates In-samplemodel…t Surveys,OrderFlowsandMacroFactors PanelA:IndustrializedEconomies Expl.VarianceInformationCriteriaMarket-TimingTests R2R2adjlog(SSR/T)AICHR(%)HM(SE) CP75-0.09-0.03560.12(0.01)AUD/USDTVP1916-0.35-0.29660.32(0.08)SCA9695-3.31-3.17970.94(0.03)CP41-0.050.01590.18(0.10)CAD/USDTVP1310-0.30-0.25650.32(0.09)SCA3227-0.54-0.40700.39(0.10)CP41-0.050.01520.04(0.09)EUR/USDTVP96-0.22-0.16660.32(0.07)SCA6764-1.35-1.22860.73(0.07)CP20-0.030.03500(-)JPY/USDTVP30-0.12-0.06660.32(0.09)SCA3834-0.58-0.46780.57(0.08)CP64-0.08-0.02640.28(0.08)CHF/EURTVP97-0.21-0.15650.30(0.08)SCA5551-1.12-0.98750.49(0.08)CP41-0.050.01500.01(0.09)GBP/USDTVP2017-0.35-0.29610.25(0.08)SCA3328-0.21-0.08740.48(0.08) Fratzscher,SarnoandZinna ScapegoatTheoryofExchangeRates Introduction Scapegoattheoryandhypotheses Dataandempiricalmethodology Empiricalresults Conclusions Scapegoatmodelestimates In-samplemodel…t Surveys,OrderFlowsandMacroFactors PanelB:EmergingMarketEconomies Expl.VarianceInformationCriterionMarket-TimingTests R2R2adjlog(SSR/T)AICHR(%)HM(SE) CP119-0.13-0.07560.12(0.10)CZK/EURTVP1613-0.23-0.17580.16(0.10)SCA4339-0.29-0.16660.31(0.11)CP41-0.050.01500.01(0.08)MXN/USDTVP85-0.15-0.09550.08(0.10)SCA103-0.17-0.03560.10(0.10)CP20-0.030.03520.04(0.09)PLN/EURTVP1614-0.29-0.23630.29(0.09)SCA48440.500.64560.13(0.10)CP20-0.030.03560.13(0.11)ZAR/USDTVP86-0.19-0.13620.24(0.10)SCA6057-0.30-0.17750.51(0.09)CP30-0.040.02590.17(0.11)SGD/USDTVP107-0.19-0.13700.41(0.08)SCA4844-0.30-0.16750.49(0.08)CP118-0.13-0.07630.25(0.08)KRW/USDTVP3027-0.64-0.58660.32(0.10)SCA8078-1.83-1.69850.71(0.08) Fratzscher,SarnoandZinna ScapegoatTheoryofExchangeRates Introduction Scapegoattheoryandhypotheses Dataandempiricalmethodology Empiricalresults Conclusions Scapegoatmodelestimates In-samplemodel…t Surveys,OrderFlowsandMacroFactors Unconditionaladj-R2 Fratzscher,SarnoandZinna ScapegoatTheoryofExchangeRates Introduction Scapegoattheoryandhypotheses Dataandempiricalmethodology Empiricalresults Conclusions Scapegoatmodelestimates In-samplemodel…t Surveys,OrderFlowsandMacroFactors PanelB:IndustrialisedEconomies DGrowthDIn‡ationDRateSTDRateLTCADEquity j10.40-0.550.480.380.76(SE)(0.06)-(0.09)(0.15)(0.10)(0.30)R2adj(%)9.6-14.57.68.22.1R2Nadj(%)19.8-32.210.916.22.2N161-13411213174 PanelC:EmergingMarketEconomies DGrowthDIn‡ationDRateSTDRateLTCADEquity j10.961.120.340.330.070.39(SE)(0.18)(0.16)(0.08)(0.20)(0.12)(0.15)R2adj(%)18.124.96.73.10.02.5R2Nadj(%)23.737.819.65.60.05.7N38736515260224 Fratzscher,SarnoandZinna ScapegoatTheoryofExchangeRates Introduction Scapegoattheoryandhypotheses Dataandempiricalmethodology Empiricalresults Conclusions Conclusions Thepresentpaperisthe…rsttestofthescapegoattheoryofexchangerates(BacchettaandvanWincoop,2004,2010). BasedonnovelsurveymeasuresofFXscapegoatsfor12currencies,andproprietaryorder‡owdata(unobservables),we…ndempiricalevidencethatstronglysupportstheempiricalimplicationsofthescapegoattheory: Thescapegoatmodeloutperforms(in-sample)twobenchmarkmodelsforalargenumberofcountriesandacrossthreeperformancecriteria. Boththescapegoatandorder‡owareimportant,andtheirrelativecontributionsvaryacrosscountriesandtime. Amacroeconomicfundamentalispickedasascapegoatattimeswhenitshowslargemovementscombinedwithlargechangesintheunobservable. Fratzscher,SarnoandZinna ScapegoatTheoryofExchangeRates