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Announcement effects on exchange rates

Author

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  • Mikael Bask

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

Abstract

An asset pricing model for exchange rate determination is presented, where technical analysis in currency trade is incorporated in the form of a moving average technique. As a result, the model has j max +1 rational expectations equilibria (REE), where j max is large, since j max past exchange rates affect the current rate due to technical analysis. There is, however, a unique REE that is economically relevant, and focusing on this REE, it is shown that the exchange rate is much more sensitive to a change in money supply than when technical analysis is absent in currency trade. This result is important since it sheds light on the so-called exchange rate disconnect puzzle in international finance. Copyright © 2008 John Wiley & Sons, Ltd.

Suggested Citation

  • Mikael Bask, 2009. "Announcement effects on exchange rates," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 14(1), pages 64-84.
  • Handle: RePEc:ijf:ijfiec:v:14:y:2009:i:1:p:64-84
    DOI: 10.1002/ijfe.380
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    File URL: http://hdl.handle.net/10.1002/ijfe.380
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Jokipii, Terhi & Lucey, Brian, 2006. "Contagion and interdependence: measuring CEE banking sector co-movements," Research Discussion Papers 15/2006, Bank of Finland.
    3. Selander, Carina, 2006. "Chartist Trading in Exchange Rate Theory," Umeå Economic Studies 698, Umeå University, Department of Economics.
    4. Bask, Mikael, 2006. "Adaptive learning in an expectational difference equation with several lags : selecting among learnable REE," Research Discussion Papers 7/2006, Bank of Finland.
    5. Hoda SELIM, "undated". "Fear of Floating and Exchange Rate Pass-Through to Inflation in Egypt," EcoMod2010 259600151, EcoMod.

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