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Exchange Rate Expectations of Chartists and FundamentalistsChristian David DickCentre for European Economic Research (ZEW) Lukas MenkhoffLeibniz Universitaet Hannover - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research) March 28, 2012 ZEW - Centre for European Economic Research Discussion Paper No. 12-026 Abstract: This paper provides novel evidence on exchange rate expectations of both chartists and fundamentalists separately. These groups indeed form expectations differently. Chartists change their expectations more often; however, all professionals' expectations vary considerably as they generally follow strong exchange rate trends. In line with non-linear exchange rate-modeling, professionals expect mean reversion only if exchange rates deviate much from PPP. Chartists survive in FX markets as they forecast equally accurately as fundamentalists. Unexpected from an efficient market viewpoint, chartists even outperform fundamentalists at short horizons. Overall, these findings clearly support the chartist-fundamentalist approach.
Number of Pages in PDF File: 53 Keywords: exchange rate formation, expectation formation, heterogeneous agent models, forecasting performance JEL Classification: F31, G15, D84 working papers seriesDate posted: April 12, 2012Suggested CitationContact Information
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