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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- Pierre-Olivier Gourinchas & Aaron Tornell, 2000.
"Exchange Rate Dynamics, Learning and Misperception,"
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CESifo Working Paper Series
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- Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
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