Should One Rely on Professional Exchange Rate Forecasts? An Empirical Analysis of Professional Forecasts for the ?/US$ Rate

Peter Bofinger () and Robert Schmidt

No 4235, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The study analyses the characteristics of professional exchange rate forecasts for the ?/US$ rate. The results indicate that the quality of forecasts produced by professional economists is rather poor and incompatible with the rational expectations hypothesis. This dismal result is according to our analysis attributed to the fact that professional forecasts are to a large extent influenced by actual changes in exchange rates. A reasonable explanation for this behaviour can be derived from the behavioural finance literature. According to the anchoring heuristic, decision processes are often dominated by available pieces of information even if they are obviously of no relevance.

Keywords: Foreign exchange market; Rational expectations; forecasts; Behavioural finance; Anchoring heuristic (search for similar items in EconPapers)
JEL-codes: F31 F47 G12 G15 (search for similar items in EconPapers)
Date: 2004-02
New Economics Papers: this item is included in nep-rmg
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Citations: View citations in EconPapers (5)

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