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Technical Trading at the Currency Market Increases the Overshooting Effect

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  • Mikael Bask

    (Department of Economics, Umeå University, Sweden)

Abstract

It is shown in this letter that the magnitude of exchange rate overshooting is larger than in Dornbusch (1976) when chartists are introduced into the model. Specifically, the extent of overshooting depends inversely on the planning horizon. The latter follows from explicitly modelling the behavior of practitioners: for shorter planning horizons, more weight is placed on technical analysis, while more weight is placed on fundamental analysis for longer planning horizons.

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Bibliographic Info

Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

Volume (Year): 16 (2003)
Issue (Month): 2 (Autumn)
Pages: 72-80

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Handle: RePEc:fep:journl:v:16:y:2003:i:2:p:72-80

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  1. Pierre-Olivier Gourinchas & Aaron Tornell, 2002. "Exchange Rate Dynamics, Learning and Misperception," NBER Working Papers 9391, National Bureau of Economic Research, Inc.
  2. Cheung, Yin-Wong & Wong, Clement Yuk-Pang, 2000. "A survey of market practitioners' views on exchange rate dynamics," Journal of International Economics, Elsevier, vol. 51(2), pages 401-419, August.
  3. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  4. Bask, Mikael, 2003. "Chartists and Fundamentalists in the Currency Market and the Volatility of Exchange Rates," UmeÃ¥ Economic Studies 605, Umeå University, Department of Economics.
  5. Yin-Wong Cheung & Menzie D. Chinn, 2000. "Currency Traders and Exchange Rate Dynamics: A Survey of the U.S. Market," CESifo Working Paper Series 251, CESifo Group Munich.
  6. Taylor, Mark P. & Allen, Helen, 1992. "The use of technical analysis in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 11(3), pages 304-314, June.
  7. Lui, Yu-Hon & Mole, David, 1998. "The use of fundamental and technical analyses by foreign exchange dealers: Hong Kong evidence," Journal of International Money and Finance, Elsevier, vol. 17(3), pages 535-545, June.
  8. Eichenbaum, Martin & Evans, Charles L, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 975-1009, November.
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