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The role of fundamentalists and technicians in the foreign exchange market when the domestic currency is pegged to a basket

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  • I. A. Moosa
  • N. E. Al-Loughani
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    Abstract

    The exchange rate of the Kuwaiti dinar against the Japanese yen is modelled in terms of the activities of fundamentalists and technicians as well as the effect of the exchange rate arrangement. The results show that market forces, as represented by the activities of traders, play a role in the determination of the exchange rate although this role is secondary to the effect of the exchange rate arrangement as represented by changes in the exchange rate of the Kuwaiti dinar against the US dollar. Non-nested model selection tests reveal that models that are based on market forces only or the exchange rate arrangement only are misspecified. There is some evidence indicating that the activity of technicians is more important for this process than the activity of fundamentalists.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

    Volume (Year): 13 (2003)
    Issue (Month): 2 ()
    Pages: 79-84

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    Handle: RePEc:taf:apfiec:v:13:y:2003:i:2:p:79-84

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    References

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    1. Goodhart, Charles, 1988. "The Foreign Exchange Market: A Random Walk with a Dragging Anchor," Economica, London School of Economics and Political Science, vol. 55(220), pages 437-60, November.
    2. Russell Davidson & James G. MacKinnon, 1980. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Working Papers 378, Queen's University, Department of Economics.
    3. 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.
    4. Pesaran, M H, 1974. "On the General Problem of Model Selection," Review of Economic Studies, Wiley Blackwell, vol. 41(2), pages 153-71, April.
    5. Allen, Helen & Taylor, Mark P, 1990. "Charts, Noise and Fundamentals in the London Foreign Exchange Market," Economic Journal, Royal Economic Society, vol. 100(400), pages 49-59, Supplemen.
    6. Moosa , Imad A. & Korczak, Marta, 2000. "The Role of Fundamentalists and Technicians in Exchange Rate Determination," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 53(1), pages 97-106.
    7. Dastoor, Naorayex K., 1983. "Some aspects of testing non-nested hypotheses," Journal of Econometrics, Elsevier, vol. 21(2), pages 213-228, February.
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    Cited by:
    1. Catherine S. F. Ho & M. Ariff, 2008. "The Role of Non-Parity Fundamentals in Exchange Rate Determination: Australia and the Asia Pacific Region," CARF F-Series CARF-F-125, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.

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