An Empirical Examination of Heterogeneity and Switching in Foreign Exchange Markets

38 Pages Posted: 23 Nov 2011 Last revised: 2 Mar 2017

See all articles by David Goldbaum

David Goldbaum

University of Technology Sydney

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: February 28, 2013


In order to study the expectation formation of financial institutions in the foreign exchange market we develop and apply a recursive selection and estimation algorithm to a dataset of surveyed foreign exchange market expectations. Responses are classified into two groups and forecasting models are endogenously determined within the groups. Estimation results reveal that a fundamentalist-chartist model is capable of explaining a large portion of foreign exchange market expectations. Allowing panelists to switch between models significantly improves the fit of the model, especially at the relatively shorter forecast horizons. We find that the fundamentalist model is increasingly used as the forecast horizon extends. Finally, results indicate that model choice is based on a combination of period-specific and individual-specific determinants.

Keywords: heterogeneity, discrete choice, foreign exchange, survey expectations

JEL Classification: F31, C35

Suggested Citation

Goldbaum, David and Zwinkels, Remco C.J., An Empirical Examination of Heterogeneity and Switching in Foreign Exchange Markets (February 28, 2013). Journal of Economic Behavior and Organization, Forthcoming. Available at SSRN: or

Remco C.J. Zwinkels (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
+31 20 59 85220 (Phone)


Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS

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