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Explaining Forward Discount Bias: Is It Anchoring?

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Author Info

  • Gruen, D.W.R.
  • Gizycki, M.C.

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.

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Bibliographic Info

Paper provided by Princeton, Woodrow Wilson School - Public and International Affairs in its series Papers with number 164.

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Length: 39 pages
Date of creation: 1993
Date of revision:
Handle: RePEc:fth:priwpu:164

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Postal: PRINCETON UNIVERSITY, WOODROW WILSON SCHOOL OF PUBLIC AND INTERNATIONAL AFFAIRS, PRINCETON NEW- JERSEY 08542 U.S.A.
Phone: (609) 258-4800
Web page: http://www.wws.princeton.edu/
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Keywords: exchange rate;

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References

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Cited by:
  1. Baryla Jr., Edward A. & Borghesi, Richard A. & Dare, William H. & Dennis, Steven A., 2007. "Learning, price formation and the early season bias in the NBA," Finance Research Letters, Elsevier, vol. 4(3), pages 155-164, September.
  2. Powell, A.A., 1995. "From Dornbush to Murphy: Stylized Monetary Dynamics of a Contemporary Macroeconometric Model," Monash Econometrics and Business Statistics Working Papers 13/95, Monash University, Department of Econometrics and Business Statistics.
  3. Shiller, Robert J., 1999. "Human behavior and the efficiency of the financial system," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 20, pages 1305-1340 Elsevier.
  4. Malcolm Edey & John Romalis, 1996. "Issues in Modelling Monetary Policy," RBA Research Discussion Papers rdp9604, Reserve Bank of Australia.

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