Influence of psychological exchange rates (PER) on forex price formation: theory, empirical, and experimental evidence

The study aims to assess the impact of psychological exchange rates on currency prices, develops a new theoretical exchange rate model, and conducts empirical analysis using historical data and a laboratory experiment with non-professional traders. When the expected psychological buying spread falls, irrational agents tend to become buyers or close their short positions, creating upward pressure on prices. Conversely, if the expected psychological short spread falls, they tend to open short positions, which increases their supply and exerts downward pressure on prices. The equilibrium of the foreign exchange market is determined by the PBER and the PSER zone. Empirical analysis has shown that psychological buying and selling rates seem to influence the euro-dollar exchange rate. We have carried out a comparative simulation of exchange rate forecasts using Psychological Exchange Rate Models (PERM), an ARIMA variance and a simple autoregressive model such as AR (4), ARIMA (4,1,4). The PERM gives better forecasts than the simple autoregressive model. The results also show that ignoring psychological exchange rates in the constant term and first order coefficient of autoregressive exchange rate models can distort forecasts. Laboratory operators' buying and selling at psychological rates generate profits, suggesting that the market reacts to these price levels.