Explaining Forward Discount Bias: Is it Anchoring?

David Gruen and Marianne Gizycki
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Marianne Gizycki: Reserve Bank of Australia

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: Anchoring is a well-documented behaviour pattern. It occurs when agents form their expectations of an objective variable by only partially adjusting from some given starting value. We present a model of the foreign exchange market in which there are two types of traders: those who are fully rational and those whose expectations are anchored to the forward exchange rate. Under plausible conditions, a significant proportion of the anchored traders survive in the market in the long-run. The model explains both forward discount bias in the direction consistently observed in foreign exchange markets and the results of surveys of market participants’ exchange rate expectations.

Date: 1993-06
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Working Paper: Explaining Forward Discount Bias: Is It Anchoring? (1993)
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