Scandinavian Working Papers in Economics
Umeå Economic Studies,
Umeå University, Department of Economics
No 605: Chartists and Fundamentalists in the Currency Market and the Volatility of Exchange Rates
Mikael Bask ()
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Mikael Bask: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Abstract: The purpose of this paper is to implement theoretically, the empirical observation that the relative importance of fundamental versus technical analysis in the foreign exchange market depends on the planning horizon. For shorter planning horizons, more weight is placed on technical analysis, while more weight is placed on fundamental analysis for longer planning horizons. The theoretical framework is the Dornbusch (1976) overshooting model. 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 (1976) model. Specifically, the extent of overshooting depends inversely on the planning horizon.
Keywords: Chartists; Excess Volatility; Foreign Exchange; Fundamentalists; Moving Averages; Overshooting; Technical Analysis
20 pages, February 14, 2003
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