Technical Trading at the Currency Market Increases the Overshooting Effect
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.
Volume (Year): 16 (2003)
Issue (Month): 2 (Autumn)
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- Gourinchas, Pierre-Olivier & Tornell, Aaron, 2003.
"Exchange Rate Dynamics, Learning and Misperception,"
CEPR Discussion Papers
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Journal of International Money and Finance,
Elsevier, vol. 20(4), pages 439-471, August.
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- Martin Eichenbaum & Charles L. Evans, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 110(4), pages 975-1009.
- Bask, Mikael, 2003. "Chartists and Fundamentalists in the Currency Market and the Volatility of Exchange Rates," Umeå Economic Studies 605, Umeå University, Department of Economics.
- 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.
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