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Behavioral Finance Meets Experimental Macroeconomics: On the Determinants of Currency Trade Decisions

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Abstract:

A novel approach which conjoins elements of experimental macroeconomics and behavioral finance allows us to study the components of industrial firms' currency trade decisions in the controlled environment of a laboratory. We analyze how firms operate in the currency market in a deterministic two-country model with two currencies. Consistent with presumptions of real-world behavior, subjects in our experiment tend to base their trade decisions on definite rather than on uncertain key data: Interest rates have a high impact, while technical analysis plays a minor role. We finally demonstrate how a simple decision rule that incorporates our findings might outperform the actually observed trade decisions.

Keywords: Currency trade; Exchange rate uncertainty; Laboratory experiment

Document Type: Research Article

DOI: http://dx.doi.org/10.1080/15427560902728969

Affiliations: 1: Laboratory for Experimental Economics, University of Bonn, 2: University of Bonn at Max Planck Institute for Research on Collective Goods, Bonn

Publication date: January 1, 2009

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