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Dispersion of Beliefs in the Foreign Exchange Market

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  • Christian Wolff

    ()
    (Luxembourg School of Finance, University of Luxembourg)

  • Ron Jongen

    ()
    (Erasmus School of Economics, Erasmus University Rotterdam)

  • Willem F.C. Verschoor

    ()
    (Erasmus School of Economics, Erasmus University Rotterdam)

  • Remco C.J. Zwinkels

    ()
    (Erasmus School of Economics, Erasmus University Rotterdam)

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 effects, 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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Bibliographic Info

Paper provided by Luxembourg School of Finance, University of Luxembourg in its series LSF Research Working Paper Series with number 09-01.

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Date of creation: 2009
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Handle: RePEc:crf:wpaper:09-01

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Keywords: Exchange rate expectations; heterogeneity; dispersion of beliefs; bounded rationality; tail behavior; survey data.;

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References

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Cited by:
  1. de Jong, Eelke & Verschoor, Willem F.C. & Zwinkels, Remco C.J., 2009. "Behavioural heterogeneity and shift-contagion: Evidence from the Asian crisis," Journal of Economic Dynamics and Control, Elsevier, vol. 33(11), pages 1929-1944, November.
  2. Francesca Pancotto & Filippo Maria Pericoli & Marco Pistagnesi, 2013. "Inefficiency in Survey Exchange Rates Forecasts," Working Papers 1/13, Sapienza University of Rome, DISS.
  3. Campbell, Rachel & Koedijk, Kees & Lothian, James R & Mahieu, Ronald J, 2007. "Irving Fisher, Expectational Errors, and the UIP Puzzle," CEPR Discussion Papers 6294, C.E.P.R. Discussion Papers.

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