Market microstructure and the imperfect common knowledge literature in macroeconomics both analyze the effect of dispersed information on prices. This paper draws on both sources to understand exchange rate forecasting errors. A theoretical model is developed showing that forecasting errors...

A theory-consistent CVAR scenario describes a set of testable regularieties one should expect to see in the data if the basic assumptions of the theoretical model are empirically valid. Using this method, the paper demonstrates that all basic assumptions about the shock structure and...