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Announcement effects on exchange rates

  • Mikael Bask

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

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.

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File URL: http://hdl.handle.net/10.1002/ijfe.380
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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 14 (2009)
Issue (Month): 1 ()
Pages: 64-84

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Handle: RePEc:ijf:ijfiec:v:14:y:2009:i:1:p:64-84
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  1. Zeeman, E. C., 1974. "On the unstable behaviour of stock exchanges," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 39-49, March.
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