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Expectation formation in an experimental foreign exchange market

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  • Johannes Leitner
  • Robert Schmidt

Abstract

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. Copyright Springer-Verlag 2007

Suggested Citation

  • Johannes Leitner & Robert Schmidt, 2007. "Expectation formation in an experimental foreign exchange market," 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. 15(2), pages 167-184, June.
    • Handle: RePEc:spr:cejnor:v:15:y:2007:i:2:p:167-184
    DOI: 10.1007/s10100-007-0024-0
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    Cited by:

    1. Sonnemans, Joep & Tuinstra, Jan, 2010. "Positive expectations feedback experiments and number guessing games as models of financial markets," Journal of Economic Psychology, Elsevier, vol. 31(6), pages 964-984, December.
    2. Tiziana Assenza & Te Bao & Cars Hommes & Domenico Massaro, 2014. "Experiments on Expectations in Macroeconomics and Finance," Research in Experimental Economics, in: Experiments in Macroeconomics, volume 17, pages 11-70, Emerald Group Publishing Limited.
    3. 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.

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