Biases of Professional Exchange Rate Forecasts: Psychological Explanations and an Experimentally-Based Comparison to Novices

Peter Bofinger (peter.bofinger@uni-wuerzburg.de), Robert Schmidt and Johannes Leitner

No 4230, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The empirical performance of macroeconomic exchange rate models is more than disappointing. This dismal result is also reflected in the forecasting capabilities of professional analysts: all in all, analysts are not in a position to beat naïve random walk forecasts. The root for this deficient outcome stems from the fact that professional forecasts are to a large extend influenced by actual changes in exchange rates. A reasonable explanation for this behaviour can be taken from the behavioural finance literature. To test whether this characteristic tends to be general human behaviour in an uncertain environment, we analyse the forecasting behaviour of students experimentally, using a simulated currency series. Our results indicate that topically-oriented trend adjustment behaviour (TOTA) is a general characteristic of human forecasting behaviour. Additionally, we apply a simple model to explain professional and student forecasts.

Keywords: Foreign exchange market; Behavioural finance; Forecasting; Anchoring heuristics; Judgement; Expertise (search for similar items in EconPapers)
JEL-codes: C53 D70 D81 F31 F47 G12 (search for similar items in EconPapers)
Date: 2004-02
New Economics Papers: this item is included in nep-ecm and nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://cepr.org/publications/DP4230 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:4230

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP4230
orders@cepr.org

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by (repec@cepr.org).