Exchange Rate Expectations of Chartists and Fundamentalists

53 Pages Posted: 12 Apr 2012

See all articles by Christian David Dick

Christian David Dick

ZEW – Leibniz Centre for European Economic Research

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin); Humboldt University of Berlin - Faculty of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 28, 2012

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.

Keywords: exchange rate formation, expectation formation, heterogeneous agent models, forecasting performance

JEL Classification: F31, G15, D84

Suggested Citation

Dick, Christian David and Menkhoff, Lukas, Exchange Rate Expectations of Chartists and Fundamentalists (March 28, 2012). ZEW - Centre for European Economic Research Discussion Paper No. 12-026. Available at SSRN: https://ssrn.com/abstract=2038396 or http://dx.doi.org/10.2139/ssrn.2038396

Christian David Dick (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Humboldt University of Berlin - Faculty of Economics ( email )

Spandauer Strasse 1
Berlin
Germany

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