WHY FINANCIAL MARKETS DO NOT USE ECONOMETRIC FORECASTING: FOREIGN EXCHANGE EXOTICS, CENTRAL BANKS AND POSITION TAKING

Clients and market practitioners act based on very different sets of information. It is natural for a client to use the Wiener-Kolmogorov prediction theory. Market makers are different. They also use econometric forecasting. But these are not standard econometric forecasting techniques. The practitioner has to take into account various levels or barriers known to exist in the short run. In this paper, we argue that the presence of such levels changes the classical forecasting problem into a Bayesian one. Copyright © 2007 The Author; Journal compilation © 2007 Blackwell Publishing Ltd and The University of Manchester.