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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. Mikael Bask, 2007. "Chartism and exchange rate volatility," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 12(3), pages 301-316.
  2. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, . "Noise Trader Risk in Financial Markets," J. Bradford De Long's Working Papers _124, University of California at Berkeley, Economics Department.
  3. Menkhoff, Lukas, 1997. "Examining the Use of Technical Currency Analysis," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(4), pages 307-18, October.
  4. McCallum, Bennett T., 1983. "On non-uniqueness in rational expectations models : An attempt at perspective," Journal of Monetary Economics, Elsevier, vol. 11(2), pages 139-168.
  5. Frankel, Jeffrey A & Froot, Kenneth A, 1986. "Understanding the U.S. Dollar in the Eighties: The Expectations of Chartists and Fundamentalists," The Economic Record, The Economic Society of Australia, vol. 0(0), pages 24-38, Supplemen.
  6. 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.
  7. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  8. Hommes, Cars H., 2006. "Heterogeneous Agent Models in Economics and Finance," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 23, pages 1109-1186 Elsevier.
  9. Cheung, Yin-Wong & Chinn, Menzie David, 2001. "Currency traders and exchange rate dynamics: a survey of the US market," Journal of International Money and Finance, Elsevier, vol. 20(4), pages 439-471, August.
  10. Menkhoff, L., 1998. "The noise trading approach -- questionnaire evidence from foreign exchange," Journal of International Money and Finance, Elsevier, vol. 17(3), pages 547-564, June.
  11. De Grauwe, Paul & Markiewicz, Agnieszka, 2013. "Learning to forecast the exchange rate: Two competing approaches," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 42-76.
  12. Mikael Bask, 2008. "Adaptive Learning in an Expectational Difference Equation with Several Lags: Selecting among Learnable REE," European Financial Management, European Financial Management Association, vol. 14(1), pages 99-117.
  13. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
  14. Zeeman, E. C., 1974. "On the unstable behaviour of stock exchanges," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 39-49, March.
  15. Oberlechner, Thomas, 2001. "Importance of Technical and Fundamental Analysis in the European Foreign Exchange Market," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(1), pages 81-93, January.
  16. 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.
  17. Thomas Gehrig & Lukas Menkhoff, 2006. "Extended evidence on the use of technical analysis in foreign exchange," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 11(4), pages 327-338.
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