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Dispersion of Beliefs in the Foreign Exchange Market

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Author Info
Jongen, Ron
Verschoor, Willem F C
Wolff, Christian C
Zwinkels, Remco C.J.

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Abstract

This paper analyzes the sources of the differential beliefs of market participants in the foreign exchange market and their relative role in forming exchange rate expectations. We find that there are distinct periods of high and low dispersion and document that dispersion arises because of a combined effect of market participants holding individual information and attach different weights to some elements of the common information set. In addition to these two effect, we also document evidence of the existence of different types of agents and find that chartist rules are predominantly used at the shorter spectrum of the forecast horizon and fundamentalist rules are predominantly used at the longer spectrum of the forecast horizon. Finally, our evidence suggests that the relationship between market volatility and trader dispersion tends to be significant and positive for different measures of both trader heterogeneity and market volatility.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6738.

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Date of creation: Mar 2008
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Handle: RePEc:cpr:ceprdp:6738

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Related research
Keywords: exchange rates; expectations; heterogeneity; survey data;

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange

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    Other versions:
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  20. Frankel, Jeffrey A & Froot, Kenneth A, 1990. "Chartists, Fundamentalists, and Trading in the Foreign Exchange Market," American Economic Review, American Economic Association, vol. 80(2), pages 181-85, May. [Downloadable!] (restricted)
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  26. Peiers, Bettina, 1997. " Informed Traders, Intervention, and Price Leadership: A Deeper View of the Microstructure of the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 52(4), pages 1589-1614, September. [Downloadable!] (restricted)
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