DP4235 Should One Rely on Professional Exchange Rate Forecasts? An Empirical Analysis of Professional Forecasts for the ?/US$ Rate

Author(s): Peter Bofinger, Robert Schmidt
Publication Date: February 2004
Keyword(s): anchoring heuristic, behavioural finance, forecasts, foreign exchange market, rational expectations
JEL(s): F31, F47, G12, G15
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4235

The study analyses the characteristics of professional exchange rate forecasts for the ?/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.