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Heterogeneity in Exchange Rate Expectations: Evidence on the Chartist-Fundamentalist Approach

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Author Info
Lukas Menkhoff ()
Rafael R. Rebitzky ()
Michael Schröder ()

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Abstract

This paper examines heterogeneity in exchange rate expectations. Whereas agents’ heterogeneity is key in modern exchange rate models, evidence on determinants of heterogeneity is weak so far. Our sample, covering expectations from about 300 forecasters over 15 years, shows remarkable time variation in dispersion. Determinants of dispersion are consistent with the chartist-fundamentalist approach: misalignments of the exchange rate and exchange rate changes explain heterogeneity. The risk premium influences heterogeneity as well, but possible impacts from macroeconomic variables and exchange rate’s volatility are dominated by the other determinants.

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Publisher Info
Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number CESifo Working Paper No. 2502.

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Date of creation: 2008
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Handle: RePEc:ces:ceswps:_2502

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Related research
Keywords: exchange rate; heterogeneity; dispersion; chartists; fundamentalists;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies

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  2. Westerhoff, Frank H., 2003. "Expectations driven distortions in the foreign exchange market," Journal of Economic Behavior & Organization, Elsevier, vol. 51(3), pages 389-412, July. [Downloadable!] (restricted)
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  3. Frank H. Westerhoff & Stefan Reitz, 2003. "Nonlinearities and Cyclical Behavior: The Role of Chartists and Fundamentalists," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 7(4). [Downloadable!]
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  4. Manzan, S. & Westerhoff, F., 2002. "Heterogeneous Expectations, Exchange Rate Dynamics and Predictability," CeNDEF Working Papers 02-14, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance. [Downloadable!]
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  5. Olivier Jeanne & Andrew K. Rose, 2002. "Noise Trading And Exchange Rate Regimes," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 537-569, May. [Downloadable!] (restricted)
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  6. Wieland, Cristian & Westerhoff, Frank H., 2005. "Exchange rate dynamics, central bank interventions and chaos control methods," Journal of Economic Behavior & Organization, Elsevier, vol. 58(1), pages 117-132, September. [Downloadable!] (restricted)
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  7. Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2005. "Heterogeneous Expectations and Speculative Behaviour in a Dynamic Multi-Asset Framework," Research Paper Series 166, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
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  8. Philippe Bacchetta & Eric Van Wincoop, 2006. "Can Information Heterogeneity Explain the Exchange Rate Determination Puzzle?," American Economic Review, American Economic Association, vol. 96(3), pages 552-576, June. [Downloadable!]
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  10. Ito, Takatoshi & Yabu, Tomoyoshi, 2007. "What prompts Japan to intervene in the Forex market? A new approach to a reaction function," Journal of International Money and Finance, Elsevier, vol. 26(2), pages 193-212, March. [Downloadable!] (restricted)
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  11. Bams, Dennis & Walkowiak, Kim & Wolff, Christian C. P., 2004. "More evidence on the dollar risk premium in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 23(2), pages 271-282, March. [Downloadable!] (restricted)
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  12. Heino Bohn Nielsen, 2004. "Cointegration analysis in the presence of outliers," Econometrics Journal, Royal Economic Society, vol. 7(1), pages 249-271, 06. [Downloadable!] (restricted)
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  15. De Grauwe, Paul & Grimaldi, Marianna, 2006. "Exchange rate puzzles: A tale of switching attractors," European Economic Review, Elsevier, vol. 50(1), pages 1-33, January. [Downloadable!] (restricted)
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  1. Gloede, Oliver & Menkhoff, Lukas, 2009. "Financial professionals' overconfidence: Is it experience, job, or attitude?," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover dp-428, Universität Hannover, Wirtschaftswissenschaftliche Fakultät. [Downloadable!]
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