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Chartism and exchange rate volatility

✍ Scribed by Mikael Bask

Publisher
John Wiley and Sons
Year
2007
Tongue
English
Weight
175 KB
Volume
12
Category
Article
ISSN
1076-9307

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✦ Synopsis

Abstract

The purpose of this paper is to implement theoretically, the observation that the relative importance of fundamental versus technical analysis in the foreign exchange market depends on the time horizon in currency trade. For shorter time horizons, more weight is placed on technical analysis, while more weight is placed on fundamental analysis for longer horizons. The theoretical framework is the Dornbusch overshooting model, where moving averages is the technical trading technique used by the chartists. The perfect foresight path near long‐run equilibrium is derived, and it is shown that the magnitude of exchange rate overshooting is larger than in the Dornbusch model. Specifically, the extent of overshooting depends inversely on the time horizon in currency trade. How changes in the model's structural parameters endogenously affect this time horizon and the magnitude of overshooting along the perfect foresight path are also derived. Copyright Β© 2007 John Wiley & Sons, Ltd.

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