Behavioral Biases in Forward Rates as Forecasts of Future Exchange Rates: Evidence of Systematic Pessimism and Under-Reaction

37 Pages Posted: 26 Jun 2015

See all articles by Raj Aggarwal

Raj Aggarwal

Kent State University Foundation; University of Akron; Federal Reserve Bank of Cleveland; Kent State University

Sijing Zong

California State University, Stanislaus - School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: June 26, 2015

Abstract

Even though the forward-spot relationship in currency markets is very important for policy makers and for corporate and investment managers, it remains a theoretical and empirical puzzle. In theory the forward rate should be an unbiased forecast of the future spot rate, but this hypothesis has little empirical support. For the currencies of the nine major industrialized countries, this paper documents that in spite of the very high trading volumes in currency markets, consistent with evidence for other asset markets, revisions in the forward rate forecasts of the future spot exchange rate reflect systematic pessimism and under-reaction to new information.

Keywords: exchange rates; forward bias; market rationality; under-reaction

JEL Classification: F31, G14, F47, G15

Suggested Citation

Aggarwal, Raj and Aggarwal, Raj and Zong, Sijing, Behavioral Biases in Forward Rates as Forecasts of Future Exchange Rates: Evidence of Systematic Pessimism and Under-Reaction (June 26, 2015). Multinational Finance Journal, Vol. 12, No. 3/4, p. 241-277, 2008, Available at SSRN: https://ssrn.com/abstract=2623421

Raj Aggarwal (Contact Author)

Kent State University Foundation ( email )

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Chesterland, OH 44026
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HOME PAGE: http://www.uakron.edu/colleges/cba/facultylist/a/aggarwal.php

University of Akron ( email )

7380 Sherman Rd
Chesterland, OH 44026
United States
440-729-6010 (Phone)

HOME PAGE: http://www.uakron.edu/colleges/cba/facultylist/a/aggarwal.php

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Kent State University ( email )

College of Business Administration
Kent, OH 44242-0001
United States

Sijing Zong

California State University, Stanislaus - School of Business ( email )

Turlock, CA 95382
United States

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