Dispersion of Beliefs and Market Volatility in the Foreign Exchange Market

33 Pages Posted: 8 Mar 2006

See all articles by Remco C. J. Zwinkels

Remco C. J. Zwinkels

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

Ron Jongen

Dutch Central Bank (DNB)

Christian C. P. Wolff

University of Luxembourg - Luxembourg School of Finance; Centre for Economic Policy Research (CEPR)

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: June 2006

Abstract

This paper examines the existence of heterogeneous expectations among market participants in the foreign exchange market by using a data set of individual market expectations for the major currencies, and approaches the formation of expectations from a bounded-rationality approach. We find that that there are distinct periods of high and low dispersion in which market participants disagree as to what will happen to the future level of the exchange rates. Furthermore, we document that the frequency at which extremist differences in expectations among market participants occurs, is higher than that what would occur under normality. Dispersion of beliefs seems to occur as a result of the combined effects of market participants holding individual expectations and attaching different weights on various elements from their information sets. Finally, we find that market volatility Granger-causes trader heterogeneity.

Keywords: Exchange rate expectations, heterogeneity, dispersion of beliefs, bounded rationality, tail behaviour, survey data

JEL Classification: F31

Suggested Citation

Zwinkels, Remco C.J. and Jongen, Ron and Wolff, Christian C. P. and Verschoor, Willem F. C., Dispersion of Beliefs and Market Volatility in the Foreign Exchange Market (June 2006). EFA 2006 Zurich Meetings. Available at SSRN: https://ssrn.com/abstract=889024 or http://dx.doi.org/10.2139/ssrn.889024

Remco C.J. Zwinkels (Contact Author)

Vrije Universiteit Amsterdam ( email )

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

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

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

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Ron Jongen

Dutch Central Bank (DNB) ( email )

P.O. Box 98
Amsterdam, 1000 AB
Netherlands

Christian C. P. Wolff

University of Luxembourg - Luxembourg School of Finance ( email )

4, rue Albert Borschette
Luxembourg, 1246
Luxembourg

HOME PAGE: http://www.lsf.lu

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Willem F. C. Verschoor

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

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

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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