Behavioral Biases in Forward Rates as Forecasts of Future Exchange Rates: Evidence of Systematic Pessimism and Under-Reaction

Abstract

Even though the forward-spot relationship in currency markets is very important for policy makers and for corporate and investment managers, it remains a theoretical and empirical puzzle. In theory the forward rate should be an unbiased forecast of the future spot rate, but this hypothesis has little empirical support. For the currencies of the nine major industrialized countries, this paper documents that in spite of the very high trading volumes in currency markets, consistent with evidence for other asset markets, revisions in the forward rate forecasts of the future spot exchange rate reflect systematic pessimism and under-reaction to new information (JEL: F31, G14, F47, G15).

Economic Expectations, Optimistic Bias, and Television Viewing During Economic Recession

“…Contrastingly, expectations at the national level more frequently predict political decisions (Mutz, 1998, p. 103). According to Aggarwal and Zong (2008), economic expectations at any level can be viewed on a continuum that ranges from pessimism (the economy will deteriorate) to optimism (the economy will get better). Economic optimism is, in fact, a variant of general optimism.…”

The Predictability of Non-Overlapping Forecasts: Evidence from a New Market

“…Nonetheless, the VAR model may be misspecified, as it ignores the possible cointegration (long-run) relationship between the cash and futures markets and, in such case, an Error-Correction Term (ECT) needs to be added (see Aggarwal and Zong, 2008). Thus, the third and fourth models used to generate simultaneous out-of-sample forecasts for cash and futures prices are the unrestricted and restricted versions, respectively, of the following bivariate VECM(p,q) (Johansen, 1988)…”

Managerial psychology and transport firms efficiency: a stochastic frontier analysis

“…Our aim in this paper is to introduce a new approach that until now remains unexplored in transportation literature. We will translate the results of previous research from behavioral corporate finance (Aggarwal et al 2014;Aggarwal 2014;Aggarwal and Zong 2008) to the study of transport firms' technical efficiency. This paper is an essay in behavioral transport literature.…”

“…This will be an attempt to propose a new explanation for technical efficiency distortions that derive from Chief Executive Officers' (CEOs) psychological biases. This paper examines whether this can be explained by behavioral factors such as CEO optimism, developing Aggarwal and Zong's (2008) approach to allow for investor risk aversion. This research focuses on the effect of managerial optimism to explain how such psychological biases influence transport firms' technical efficiency.…”