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Explaining Forward Discount Bias: Is it Anchoring?

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  • David W.R. Gruen

    (Reserve Bank of Australia)

  • Marianne C. Gizycki

    (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.

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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp9307.

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Date of creation: Jun 1993
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Handle: RePEc:rba:rbardp:rdp9307

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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, Alan A., 2000. "From Dornbusch to Murphy: Stylized Monetary Dynamics of a Contemporary Macroeconometric Model," Journal of Policy Modeling, Elsevier, vol. 22(1), pages 99-116, January.
  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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