Expectation formation in an experimental foreign exchange market

Johannes Leitner () and Robert Schmidt ()

Central European Journal of Operations Research, 2007, vol. 15, issue 2, 167-184

Abstract: Participants of an experimental foreign exchange market forecast an exchange rate with an unknown price reaction function. Aggregate demand is derived from their own forecasts and random shocks. Our experimental results indicate that the expectations of the subjects tend to be coordinated on a common prediction strategy. This strategy is best described as a trend-extrapolative, destabilizing expectation formation scheme. Deviations from common expectations are mainly caused by random shocks, which can be ascribed to the similarity of the subjects’ behavior within and between the different markets. The findings can be explained using insights of behavioral economics. Copyright Springer-Verlag 2007

Keywords: Foreign exchange market; Experimental economics; Behavioral finance; Expectation formation (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1007/s10100-007-0024-0

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