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How good are professional exchange rate forecasts?

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  • Peter Bofinger
  • Robert Schmidt

Abstract

Future exchange rate trends are of vital importance for many economic decisions. The recent gain in strength of the euro over the US dollar clearly show the negative impact of such unexpected exchange rate changes. In order to optimise risks and profits from exchange rate changes, numerous enterprises practise active currency management. Exchange rate forecasting is an important condition of any currency management. Since there is no exchange rate model that leads to satisfactory results, the enterprises frequently resort to the forecasts of professional analysts. At the Chair for Economics, Monetary and International Economic Relations at Würzburg University, the usefulness of such market forecasts was tested. The result was quite sobering: The market forecasts of the three providers included in the study (Consensus Economics, Reuters, ZEW Financial Market Survey) supplied no useful decision-making help for internationally active enterprises. Furthermore, the analysis showed that the examined market forecasts are not compatible with the concept of rational expectations. The analysts orient themselves too strongly on exchange-rate developments observed at the time of the forecasting. This behaviour can be explained very well by means of the anchoring and adaptation heuristics that play an important role in the literature of behavioural finance.

Suggested Citation

  • Peter Bofinger & Robert Schmidt, 2003. "How good are professional exchange rate forecasts?," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 56(17), pages 7-14, September.
    • Handle: RePEc:ces:ifosdt:v:56:y:2003:i:17:p:7-14
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    References listed on IDEAS

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    1. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, vol. 77(1), pages 133-153, March.
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    4. 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 321-343, July.
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    6. Schmidt, Robert, 2003. "Zur Qualität professioneller Wechselkursprognosen," W.E.P. - Würzburg Economic Papers 36, University of Würzburg, Department of Economics.
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    Cited by:

    1. Leitner, Johannes & Schmidt, Robert & Bofinger, Peter, 2003. "Biases of professional exchange rate forecasts: Psychological explanations and an experimentally based comparison to novices," W.E.P. - Würzburg Economic Papers 39, University of Würzburg, Department of Economics.

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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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