Excessive Speculation in Foreign Exchange Markets

Hersh Shefrin

in Beyond Greed and Fear

Published in print October 2002 | ISBN: 9780195161212
Published online November 2003 | e-ISBN: 9780199832996 | DOI:

Series: Financial Management Association Survey and Synthesis Series

 Excessive Speculation in Foreign Exchange Markets

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

Chapter.  3287 words.  Illustrated.

Subjects: Financial Markets

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