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Title:Biases of professional exchange rate forecasts: Psychological explanations and an experimentally based comparison to novices PDF Logo
Authors:Leitner, Johannes
Schmidt, Robert
Bofinger, Peter
Issue Date:2003
Series/Report no.:Würzburg economic papers 39
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 naïve random walk forecasts. The root for this deficient outcome stems from the fact that professional forecasts are to a large extend 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.
Subjects:Foreign exchange market
forecasting
behavioural finance
anchoring heuristics
judgement
expertise
JEL:F31
F47
G12
G15
E27
D81
D7
C53
C92
Document Type:Working Paper
Appears in Collections:W.E.P. - Würzburg Economic Papers, Lst. f. VWL, Geld u. internat. Wirtschaftsbeziehungen, Universität Würzburg

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