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Explaining Forward Discount Bias: Is It Anchoring?

  • Gruen, D.W.R.
  • Gizycki, M.C.

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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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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PRINCETON UNIVERSITY, WOODROW WILSON SCHOOL OF PUBLIC AND INTERNATIONAL AFFAIRS, PRINCETON NEW- JERSEY 08542 U.S.A.

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