Should One Rely on Professional Exchange Rate Forecasts? An Empirical Analysis of Professional Forecasts for the Eur/Us-$ Rate

Abstract

The study analyses the characteristics of professional exchange rate forecasts for the EUR/US-$ rate. The results indicate that the quality of forecasts produced by professional economists is rather poor and incompatible with the rational expectations hypothesis. This dismal result is according to our analysis attributed to 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 derived from the behavioural 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.

Keywords: Foreign exchange market, rational expectations, forecasts, behavioural finance, anchoring heuristic

JEL Classification: F31, F47, G12, G15