Robert Schmidt

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

The study analyses the characteristics of professional exchange rate forecasts for the €/US

Rate

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.

A systematic comparison of professional exchange rate forecasts with the judgemental forecasts of novices

Professional forecasters in foreign exchange markets are not able to beat naive forecasts. In order to find reasons for this phenomenon we compare the empirical forecasts of experts with the experimentally generated forecasts of novices for the EUR/USD exchange rate in three different forecast horizons. Although the subjects are only provided with the realizations of the exchange rate and are not supported by any statistical procedures they outperform experts in accuracy. Professionals consistently expect a reversal of forgoing exchange rate changes whereas novices extrapolate trends. The judgemental forecasts appear to be unbiased and professionals appear to be biased. We demonstrate that professionals are influenced by the fundamental value—an irrelevant anchor in speculative exchange markets. The poor performance of the experts is not a common failure of human decision-making in market environments but caused by misleading information.

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

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 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 topically-oriented trend adjustment behaviour (TOTA) is a general characteristic of human forecasting behaviour. Additionally, we apply a simple model to explain professional and student forecasts.

Expectation formation in an experimental foreign exchange market

Participants of an experimental foreign exchange market forecast an exchange rate with an unknown price reaction function. Aggregate demand is derived from their own forecasts and random shocks. Our experimental results indicate that the expectations of the subjects tend to be coordinated on a common prediction strategy. This strategy is best described as a trend-extrapolative, destabilizing expectation formation scheme. Deviations from common expectations are mainly caused by random shocks, which can be ascribed to the similarity of the subjects’ behavior within and between the different markets. The findings can be explained using insights of behavioral economics.

Sterilized Foreign Exchange Market Interventions in a Chartist- Fundamentalist Exchange Rate Model

Sterilized foreign exchange market interventions are commonly dismissed by economists as an ineffective policy instrument. Nevertheless many central banks operating under independently floating exchange rates regimes are often engaged in sales and purchases of foreign exchange in order to manipulate the current value of their currencies. In this paper we argue that the skepticism of many economists can be ascribed to their orientation on fundamental-based, efficient-market exchange rate models. Given their weak empirical support, however, it is unreasonable to evaluate the effectiveness of sterilized foreign exchange interventions against the background of this class of models. Therefore, the purpose of this paper is to investigate the effectiveness of sterilized foreign exchange market interventions on the basis of a more suitable model. Using a chartist-fundamentalist model we show that central banks can influence exchange rates by using sterilized interventions. In particular, turning points occur earlier and exchange rate misalignments are substantially reduced.

A Systematic Comparison of Professional Exchange Rate Forecasts with Judgmental Forecasts of Novices - are There Substantial Differences?

The study at hand deals with the expectations of professional analysts and novices in the context of foreign exchange markets. We analyze the respective forecasting accuracy and our results indicate that there exist substantial differences between professional forecasts and judgmental forecasts of novices. In search of reasonable explanations for the astonishing result, we evaluate the nature of professional and experimental expectations in more detail and find that while professional exchange rate forecasts seem to be biased predictors for the future exchange rates, judgmental forecasts appear to be unbiased. Furthermore, professional forecasters consistently expect a reversal of forgoing exchange rate changes whereas novices expect a continuation of current movements in the short-run and are reversed in the long-run.

Der "Bank Lending Channel" in der Transmission monetärer Impulse

In den vergangenen Jahren ist die Rolle des Finanzsystems in der Transmission monetärer Impulse erneut diskutiert worden (siehe bspw. Mishkin, 1995). Mit der Bezeichnung „Lending View“ wurde u.a. von Bernanke und Blinder (1988), Bernanke (1993), Friedman und Kuttner (1993) und Kashyap und Stein (1994) ein Ansatz entwickelt, der dem Verhalten der Banken in der Übertragung geldpolitischer Maßnahmen auf die realwirtschaftliche Entwicklung eine höhere Bedeutung beimisst, als dies die bis dahin etablierte transmissionstheoretische Vorstellung des „Money View“ nahe legt. Die traditionelle Sichtweise – die zum Beispiel auch dem Standard-IS-LM Modell zugrunde liegt – stützt sich auf das Leitbild friktionsloser Finanzmärkte. Die Rolle der Banken im Wirtschaftsgeschehen ist rein passiv und reduziert sich auf die Abwicklung des Zahlungsverkehrs. Geldpolitische Maßnahmen der Notenbank wirken auf den Geldmarkt, was sich umgehend in einer Veränderung der Kapitalnutzungskosten und entsprechenden Auswirkungen auf die Investitionstätigkeit der Unternehmen niederschlägt. Auf Grund der Betonung von Geld bzw. der Kapitalnutzungskosten wird dieser Transmissionsweg in der Literatur als „Money Channel“ oder „Interest Rate Channel“ bezeichnet.