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

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  • Johannes Leitner
  • Robert Schmidt

Abstract

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. Copyright Springer-Verlag 2006

Suggested Citation

  • Johannes Leitner & Robert Schmidt, 2006. "A systematic comparison of professional exchange rate forecasts with the judgemental forecasts of novices," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 14(1), pages 87-102, February.
    • Handle: RePEc:spr:cejnor:v:14:y:2006:i:1:p:87-102
    DOI: 10.1007/s10100-006-0161-x
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    Citations

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    Cited by:

    1. Theocharis, Zoe & Harvey, Nigel, 2016. "Order effects in judgmental forecasting," International Journal of Forecasting, Elsevier, vol. 32(1), pages 44-60.
    2. Sel, Burakhan & Minner, Stefan, 2022. "A hedging policy for seaborne forward freight markets based on probabilistic forecasts," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 166(C).
    3. Holmes, Mark J. & Iregui, Ana María & Otero, Jesús, 2021. "The effects of FX-interventions on forecasters disagreement: A mixed data sampling view," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    4. Meub, Lukas & Proeger, Till & Bizer, Kilian, 2013. "Anchoring: A valid explanation for biased forecasts when rational predictions are easily accessible and well incentivized?," University of Göttingen Working Papers in Economics 166, University of Goettingen, Department of Economics.
    5. Leitner, Johannes & Leopold-Wildburger, Ulrike, 2011. "Experiments on forecasting behavior with several sources of information - A review of the literature," European Journal of Operational Research, Elsevier, vol. 213(3), pages 459-469, September.
    6. Frederik Kunze, 2020. "Predicting exchange rates in Asia: New insights on the accuracy of survey forecasts," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(2), pages 313-333, March.
    7. Brückbauer Frank & Schröder Michael, 2023. "The ZEW Financial Market Survey Panel," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 243(3-4), pages 451-469, June.
    8. Kunze, Frederik, 2017. "Predicting exchange rates in Asia: New insights on the accuracy of survey forecasts," University of Göttingen Working Papers in Economics 326, University of Goettingen, Department of Economics.
    9. Meub, Lukas & Proeger, Till, 2016. "Can anchoring explain biased forecasts? Experimental evidence," Journal of Behavioral and Experimental Finance, Elsevier, vol. 12(C), pages 1-13.
    10. Clements, Kenneth W. & Lan, Yihui, 2010. "A new approach to forecasting exchange rates," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1424-1437, November.
    11. Brückbauer, Frank & Schröder, Michael, 2021. "Data resource profile: The ZEW FMS dataset," ZEW Discussion Papers 21-100, ZEW - Leibniz Centre for European Economic Research.
    12. Niklas Valentin Lehmann, 2023. "Forecasting skill of a crowd-prediction platform: A comparison of exchange rate forecasts," Papers 2312.09081, arXiv.org.

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