✦ LIBER ✦

Announcement effects on exchange rates

✍ Scribed by Mikael Bask

Publisher: John Wiley and Sons
Year: 2009
Tongue: English
Weight: 369 KB
Volume: 14
Category: Article
ISSN: 1076-9307
DOI: 10.1002/ijfe.380

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✦ Synopsis

Abstract

An asset pricing model for exchange rate determination is presented, where technical analysis in currency trade is incorporated in the form of a moving average technique. As a result, the model has j~max~+1 rational expectations equilibria (REE), where j~max~ is large, since j~max~ past exchange rates affect the current rate due to technical analysis. There is, however, a unique REE that is economically relevant, and focusing on this REE, it is shown that the exchange rate is much more sensitive to a change in money supply than when technical analysis is absent in currency trade. This result is important since it sheds light on the so‐called exchange rate disconnect puzzle in international finance. Copyright © 2008 John Wiley & Sons, Ltd.

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