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

Peter Bofinger (), Johannes Leitner and Robert Schmidt

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: anchoring heuristics; behavioural finance; expertise; forecasting; foreign exchange market; judgement (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
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