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

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Author Info
Bofinger, Peter
Leitner, Johannes
Schmidt, Robert
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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4230.

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Date of creation: Feb 2004
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Handle: RePEc:cpr:ceprdp:4230

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Related research
Keywords: anchoring heuristics; behavioural finance; expertise; forecasting; foreign exchange market; judgement;

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Find related papers by JEL classification:
C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Other Model Applications
D70 - Microeconomics - - Analysis of Collective Decision-Making - - - General
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
F31 - International Economics - - International Finance - - - Foreign Exchange
F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Stefan Reitz & Georg Stadtmann, 2005. "Consensus among FX forecasters?," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 1(4), pages 223-227, July. [Downloadable!] (restricted)
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