Investor Overconfidence and the Forward Discount Puzzle
This paper offers an explanation for the forward discount puzzle in foreign ex- change markets based upon investor overconfidence, a well-documented psychological phenomenon that has been found to be consistent with several trading and return patterns in securities markets. In our model, overconfident individuals overreact to their information about future inflation differential. The spot and the forward ex- change rates differentially reflect such overreaction; as a result, the forward discount forecasts reversal in the spot rate. With plausible parameters, our model explains the existence of forward discount puzzle as well as known stylized facts such as how the forward discount bias varies with time horizon and time-series versus cross-sectional test method. Further, our model generates new empirical predictions such as how the forward discount bias varies with shifts in volume and volatility.
Bing Han David Hirshleifer Tracy Yue Wang
McCombs School of Business, University of Texas at Austin, 1 University Station - B6600, Austin, TX Merage Chair in Business Growth, Finance, The Paul Merage School of Business, Irvine, CA 92697
国际会议
成都
英文
1-47
2007-07-09（万方平台首次上网日期，不代表论文的发表时间）