Overreaction in Survey Exchange Rate Forecasts
Version of Record online: 14 MAR 2014
Copyright © 2014 John Wiley & Sons, Ltd.
Journal of Forecasting
Volume 33, Issue 4, pages 243–258, July 2014
How to Cite
2014), Overreaction in Survey Exchange Rate Forecasts, Journal of Forecasting, 33, pages 243–258. DOI: 10.1002/for.2289, and (
- Issue online: 20 JUN 2014
- Version of Record online: 14 MAR 2014
- Manuscript Accepted: 21 JAN 2014
- Manuscript Received: 17 MAY 2013
- forecast efficiency;
- Bloomberg survey
We use survey data on five bilateral exchange rates to provide empirical evidence of the fact that professional forecasters of foreign exchange rates behave irrationally, in the specific sense that they respond inaccurately to available information in the market when forming their predictions. In particular, we find systematic biases in the forecasts resulting in the overreaction of analysts to past information contained in the exchange rate dynamics: forecasters change their prediction more than it would be rational on the basis of past realized changes. In addition, forecasters are heterogeneous in their irrationality: low performers in previous periods show a more pronounced overreaction effect. This can be read as an indication of perpetration of past errors and continued inability to learn from the past. In the second part of the paper, we exploit the novel structure of our dataset, which consists of survey data extracted from the Bloomberg platform and readily available to anyone. This feature allows us to consider their own and others' past forecasts as part of the information set that analysts use in making their predictions. By using past forecasts as proxies for relevant macroeconomic variables, we find evidence that analysts fail to correctly process not only the information contained in the spot rate past dynamics but also the information in this broader set. We see this as confirmation of the existence of inefficiency and heterogeneity between low and high performers also when full information is available. Copyright © 2014 John Wiley & Sons, Ltd.