Testing rationality of foreign exchange forecasts under flexible loss: survey evidence from Brazil

This study asks whether the Brazilian exchange rate (R$/US$) survey forecasts are rational under flexible loss. For 2001--2011, the forecasts overpredict. The bias in shorter-horizon forecasts is due to an inefficient use of information, while the bias in longer-horizon forecasts seems to reflect asymmetric loss. Further evidence indicates that the shorter-horizon (longer-horizon) forecasts are significantly less accurate than (as accurate as) those of the random walk. These forecasts, however, are not directionally accurate and are thus of no value to a user. The backward-looking nature of the forecasts may be due to reliance on simple forecasting rules (heuristics) since experts have great difficulty understanding the complex market dynamics.