Biases of Professional Exchange Rate Forecasts: Psychological Explanations and an Experimentally Based Comparison to Novices

Wuerzburg Economic Working Paper No. 39

24 Pages Posted: 17 Nov 2003

See all articles by Johannes Leitner

Johannes Leitner

Universität Graz - Institut für Statistik und Operations Research

Robert Schmidt

University of Würzburg - Institute of Economics and Social Sciences

Peter Bofinger

University of Würzburg - Institute of Economics and Social Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: October 2003

Abstract

The empirical performance of macroeconomic exchange rate models is more than disappointing. This dismal result is also reflected in the forecasting capabilities of professional analysts: all in all, analysts are not in a position to beat naive random walk forecasts. The root for this deficient outcome stems from the fact that professional forecasts are to a large extent influenced by actual changes in exchange rates. A reasonable explanation for this behaviour can be taken from the behavioural finance literature. To test whether this characteristic tends to be general human behaviour in an uncertain environment, we analyse the forecasting behaviour of students experimentally, using a simulated currency series. Our results indicate that a topically oriented trend adjustment behaviour (TOTA) is a general characteristic of human forecasting behaviour. Additionally, we apply a simple model to explain professional and students forecasts.

Keywords: Foreign exchange market, forecasting, behavioural finance, anchoring heuristics, judgement, expertise

JEL Classification: F31, F47, G12, G15

Suggested Citation

Leitner, Johannes and Schmidt, Robert and Bofinger, Peter, Biases of Professional Exchange Rate Forecasts: Psychological Explanations and an Experimentally Based Comparison to Novices (October 2003). Wuerzburg Economic Working Paper No. 39, Available at SSRN: https://ssrn.com/abstract=461985 or http://dx.doi.org/10.2139/ssrn.461985

Johannes Leitner

Universität Graz - Institut für Statistik und Operations Research ( email )

Universitätsstraße 15/E3
Graz, A-8010
Austria
+43(316)380-7245 (Phone)
+43(316)380-9560 (Fax)

Robert Schmidt (Contact Author)

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
Wuerzburg, 97070
Germany
+49 931 312 948 (Phone)
+49 931 312 775 (Fax)

Peter Bofinger

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
Wuerzburg, 97070
Germany
+49 931 312 944/5 (Phone)
+49 931 312 775 (Fax)

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