Research Discussion Paper – RDP 9307 Explaining Forward Discount Bias: Is it Anchoring?

Contents

• Introduction
• Irrational Agents, Anchoring and Foreign Exchange Puzzles
• Anchoring as an Explanation
• A Model with Anchored and Rational Traders
• Empirical Results
• Conclusion
• Appendix A: Reduced Forms for the Stochastic Environment
• Appendix B: The Traders' Asset – Demand Functions
• Appendix C: Asset Supplies not Equal to the Traders' Minimum-Variance Portfolio
• Appendix D: Augmented Dickey-Fuller Tests on 3-Month Nominal Interest Differentials
• Appendix E: Comparing the Traders' Performance
• Appendix F: Real Exchange Rate Shocks are AR(1)
• Data Appendix
• Tables and Figures
• References

We are grateful to seminar participants at the Reserve Bank of Australia, Princeton University, 1992 NBER Summer Institute, Division of International Finance, Board of Governors of the Federal Reserve, and IMF Research Department for helpful comments. We especially thank William Branson, Avinash Dixit, Jon Faust, Ken Froot, Atish Ghosh, Daniel Kahneman, Philip Lowe, Gordon Menzies, Paolo Pesenti and Ken Rogoff. The views expressed herein are those of the authors and do not necessarily reflect the views of the Reserve Bank of Australia. Any remaining errors are ours.