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Chartism and exchange rate volatility

Author

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  • Mikael Bask

    (Monetary Policy and Research Department, Bank of Finland, Finland)

Abstract

The purpose of this paper is to implement theoretically, the observation that the relative importance of fundamental versus technical analysis in the foreign exchange market depends on the time horizon in currency trade. For shorter time horizons, more weight is placed on technical analysis, while more weight is placed on fundamental analysis for longer horizons. The theoretical framework is the Dornbusch overshooting model, where moving averages is the technical trading technique used by the chartists. The perfect foresight path near long-run equilibrium is derived, and it is shown that the magnitude of exchange rate overshooting is larger than in the Dornbusch model. Specifically, the extent of overshooting depends inversely on the time horizon in currency trade. How changes in the model's structural parameters endogenously affect this time horizon and the magnitude of overshooting along the perfect foresight path are also derived. Copyright © 2007 John Wiley & Sons, Ltd.

Suggested Citation

  • Mikael Bask, 2007. "Chartism and exchange rate volatility," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(3), pages 301-316.
    • Handle: RePEc:ijf:ijfiec:v:12:y:2007:i:3:p:301-316
    DOI: 10.1002/ijfe.315
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    References listed on IDEAS

    as
    1. Flood, Robert P & Rose, Andrew K, 1999. "Understanding Exchange Rate Volatility without the Contrivance of Macroeconomics," Economic Journal, Royal Economic Society, vol. 109(459), pages 660-672, November.
    2. Lui, Yu-Hon & Mole, David, 1998. "The use of fundamental and technical analyses by foreign exchange dealers: Hong Kong evidence," Journal of International Money and Finance, Elsevier, vol. 17(3), pages 535-545, June.
    3. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
    4. Christopher J. Neely, 1997. "Technical analysis in the foreign exchange market: a layman's guide," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 23-38.
    5. Allen, Helen & Taylor, Mark P, 1990. "Charts, Noise and Fundamentals in the London Foreign Exchange Market," Economic Journal, Royal Economic Society, vol. 100(400), pages 49-59, Supplemen.
    6. Dixon, Huw D, 1999. "Controversy: Exchange Rates and Fundamentals," Economic Journal, Royal Economic Society, vol. 109(459), pages 652-654, November.
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    Citations

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    Cited by:

    1. Mikael Bask, 2009. "Optimal monetary policy under heterogeneity in currency trade," Journal of Financial Economic Policy, Emerald Group Publishing Limited, vol. 1(4), pages 338-354, November.
    2. Bask, Mikael, 2007. "Long swings and chaos in the exchange rate in a DSGE model with a Taylor rule," Research Discussion Papers 19/2007, Bank of Finland.
    3. Wan, Jer-Yuh & Kao, Chung-Wei, 2009. "Evidence on the contrarian trading in foreign exchange markets," Economic Modelling, Elsevier, vol. 26(6), pages 1420-1431, November.
    4. Mikael Bask & Jarko Fidrmuc, 2009. "Fundamentals and Technical Trading: Behavior of Exchange Rates in the CEECs," Open Economies Review, Springer, vol. 20(5), pages 589-605, November.
    5. Lewis Vivien & Markiewicz Agnieszka, 2009. "Model Misspecification, Learning and the Exchange Rate Disconnect Puzzle," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-24, April.
    6. Teresa Aparicio & Dulce Saura, 2013. "Do Exchange Rate Series Present General Dependence? Some Results using Recurrence Quantification Analysis," Journal of Economics and Behavioral Studies, AMH International, vol. 5(10), pages 678-686.
    7. Pippenger, John, 2008. "Freely Floating Exchange Rates Do Not Systematically Overshoot," University of California at Santa Barbara, Economics Working Paper Series qt97m8z6hw, Department of Economics, UC Santa Barbara.
    8. Bask, Mikael, 2009. "Instrument rules in monetary policy under heterogeneity in currency trade," Journal of Economics and Business, Elsevier, vol. 61(2), pages 97-111.
    9. Mikael Bask, 2009. "Optimal monetary policy under heterogeneity in currency trade," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 1(4), pages 338-354, November.
    10. repec:zbw:bofrdp:2007_019 is not listed on IDEAS
    11. Bask, Mikael, 2007. "Long swings and chaos in the exchange rate in a DSGE model with a Taylor rule," Bank of Finland Research Discussion Papers 19/2007, Bank of Finland.
    12. repec:zbw:bofrdp:2007_022 is not listed on IDEAS
    13. repec:zbw:bofrdp:2007_021 is not listed on IDEAS
    14. Mikael Bask, 2009. "Announcement effects on exchange rates," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(1), pages 64-84.
    15. Bask, Mikael, 2009. "Instrument rules in monetary policy under heterogeneity in currency trade," Journal of Economics and Business, Elsevier, vol. 61(2), pages 97-111.

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