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Should one rely on professional exchange rate forecasts: An empirical analysis of professional forecasts for the €/US-$ rate

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  • Bofinger, Peter
  • Schmidt, Robert
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    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 profes-sional economists is rather poor and incompatible with the rational expectations hy-pothesis. This dismal result is according to our analysis attributed to 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 derived from the behav-ioural 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. --

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    Bibliographic Info

    Paper provided by University of Würzburg, Chair for Monetary Policy and International Economics in its series W.E.P. - Würzburg Economic Papers with number 38.

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    Date of creation: 2003
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    Handle: RePEc:zbw:wuewep:38

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    Related research

    Keywords: foreign exchange market; rational expectations; forecasts; behavioural finance; anchoring heuristics;

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    References

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    1. Cavaglia, Stefano M F G & Verschoor, Willem F C & Wolff, Christian C P, 1994. "On the Biasedness of Forward Foreign Exchange Rates: Irrationality or Risk Premia?," The Journal of Business, University of Chicago Press, vol. 67(3), pages 321-43, July.
    2. Francis X. Diebold & Jose A. Lopez, 1996. "Forecast Evaluation and Combination," NBER Technical Working Papers 0192, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Bofinger, Peter & Leitner, Johannes & Schmidt, Robert, 2004. "Biases of Professional Exchange Rate Forecasts: Psychological Explanations and an Experimentally-Based Comparison to Novices," CEPR Discussion Papers 4230, C.E.P.R. Discussion Papers.

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