Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 594: Chartists and Fundamentalists in the Currency Market and the Volatility of Exchange Rates: First Results

Mikael Bask ()
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Mikael Bask: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden

Abstract: It is shown in this letter that the magnitude of exchange rate overshooting is larger than in Dornbusch (1976) when chartists are introduced into the model. Also, the extent of overshooting depends inversely on the planning horizon. The latter follows from explicitly modelling the empirical observation that, for shorter planning horizons, more weight is placed on technical analysis, while more weight is placed on fundamental analysis for longer planning horizons.

Keywords: Foreign Exchange; Fundamental Analysis; Overshooting; Technical Analysis

JEL-codes: F31

7 pages, October 23, 2002

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