Chapter 21. Excessive Speculation in Foreign Exchange Markets

Author: Shefrin, Hersh

Source: Beyond Greed and Fear, October 2002 , pp. 299-309(11)

Publisher: Oxford Scholarship Online Monographs

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Abstract:

Foreign exchange traders engage in excessive speculation, stemming from heuristic-driven bias. In particular, foreign exchange traders seem to overreact, bet on trends, and are overconfident. Therefore, the foreign exchange market shares similar features with the pick-a-number game described in Chapter 1. Foreign exchange rates are affected by both fundamental economic factors and by sentiment. This is yet one more instance where heuristic-driven bias leads to market inefficiency.

Keywords: forward discount; psychology; extreme forecasts; overconfidence; market efficiency

Document Type: Research article

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