Exchange Rate Dynamics in a Target Zone - A Heterogeneous Expectations Approach

Bauer, Christian; Reitz, Stefan

doi:10.2139/ssrn.1157769

Cited by 20 publications

(17 citation statements)

References 108 publications

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“…We provide clear support for the core assumptions of chartist-fundamentalist models, such as formulated by De Grauwe and Grimaldi (2006), Bauer, De Grauwe, andReitz (2009) or Dieci and. In particular, we find that (1) chartists and fundamentalists do indeed form different exchange rate expectations; chartists' expectations are more in line with trends while fundamentalists consider mean reversion slightly more.…”

Section: Discussionsupporting

confidence: 75%

“…In a somewhat forward-looking modification of this rule, it is often assumed that the influence of fundamentalism increases when the exchange rate deviates more clearly from its fundamental equilibrium (e.g., Bauer, De Grauwe, and Reitz, 2009). In line with recent empirical exchange rate modeling, De Grauwe and Grimaldi (2006) introduce transaction costs to incorporate a non-linear response of exchange rates to changes in fundamentals (e.g.…”

Section: Literature and Hypothesesmentioning

confidence: 99%

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Exchange rate expectations of chartists and fundamentalists

Dick

Menkhoff

2013

Journal of Economic Dynamics and Control

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Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW. Non-technical SummaryThe present study compares exchange rate expectations of "chartists" and "fundamentalists." "Chartists" are those financial market participants who base their forecasts and actions on past price movements of their asset (here: a currency). "Fundamentalists," on the other hand, are financial market participants who base their forecasts and actions on economic models.Various studies give empirical evidence for the presence of chartists and fundamentalists in FX markets. Expectation formation of exchange rate forecasters per se has also been studied from various perspectives in the literature. Our study, however, goes beyond previous research, as it is the first to explicitly connect the two strands of literature: how exactly do professional analysts, who claim to be either chartists or fundamentalists, make their respective exchange rate forecasts?Our study is divided into three parts. In a first step, we analyze chartists' and fundamentalists' forecast behavior. Models including chartists and fundamentalists often make specific assumptions about these two groups. Our research can help verify these assumptions. In a second step, we model forecast dynamics caused by changes in forecasting strategies and identify the factors motivating a change in strategy. Theoretical models with chartists and fundamentalists suppose that chartists do not systematically perform worse than fundamentalists (as would be expected in efficient markets). Therefore, in a third step, we investigate forecasting performance, i.e. whether chartists' forecasts may be used as the basis for profitable trading strategies in the same manner as fundamentalists'.In order to address this question, we combine two data sets. One is a set of micro data consisting of monthly USD/EUR forecasts made by professional analysts starting with the introduction of the Euro. Our second data set comprises information on the self-assessment of almost 400 of these professional analysts, i.e., on the degree to which they claim to rely on fundamental analysis or chart analysis to make their forecasts. The combination of the two data sets allows us to put analysts' selfassessment and their actual forecasts into context. Our panel comprises more than 30,000 observations over the course of 153 months.Our results confirm relevant assumptions made in chartist-fundamentalist models: Chartists follow trends more often than fundamentalists and change the direction of their forecasts more often. However, th...

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Section: Discussionsupporting

confidence: 75%

Section: Literature and Hypothesesmentioning

confidence: 99%

Exchange rate expectations of chartists and fundamentalists

Dick

Menkhoff

2013

Journal of Economic Dynamics and Control

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“…macro-finance-interaction) model framework because 1 A litereture overview can be found in Samanidou et al (2007), an empirical model contest in Franke and Westerhoff (2012a). For illustrative examples on exchange rate modeling consult Grauwe and Grimaldi (2005) and Bauer et al (2009). 2 A new literature designs agent-based macroeconomic models as object oriented simulations without the need for any equation system.…”

mentioning

confidence: 99%

Optimal monetary policy in a new Keynesian model with animal spirits and financial markets

Lengnick

Wohltmann

2016

Journal of Economic Dynamics and Control

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may University of KielHans-Werner Wohltmann * * University of Kiel AbstractThis paper relates to the literature on macro-finance-interaction models. We modify the boundedly rational New Keynesian model of De Grauwe (2010a) using a completely microfounded IS equation, and combine it with the agent-based financial market model of Westerhoff (2008). For this purpose we derive four interactive channels between the financial and real sector where two channels are strictly microfounded. We analyze the impact of the different channels on economic stability and derive optimal (simple) monetary policy rules. We find that coefficients of optimal simple Taylor rules do not significantly change if financial market stabilization becomes part of the central bank's objective function. Additionally, we show that rule-based, backward-looking monetary policy creates huge instabilities if expectations are boundedly rational.JEL classification: E03, E5, G02

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“…It will be shown that the resulting market model is a natural generalization of the widely used geometric Brownian motion. Furthermore, it is shown that feedback-based trading strategies are able to skew prices (which is in line with [7]) and even cause bubbles. It will be discused how technical trading restrictions must look like in order to prevent bubbles.…”

Section: Motivation and Introductionmentioning

confidence: 65%

Effects of linear feedback trading in an interactive market model

Baumann

2015

2015 American Control Conference (ACC)

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Abstract-In the literature a lot of articles about so-called feedback-based trading strategies, i.e., strategies that compute investment exclusively from their own gain exist. Price is therein treated as a disturbance variable in the technical application. With these strategies, astonishing results may be shown. However, the so-called price taker property is always assumed, that means that one's own trading does not affect the price, which is quite unrealistic. In the work at hand, an interactive and thus more realistic market model is introduced which is completely determined by the traders' decisions. In this market model, distinct groups of traders can interact, e.g., feedback traders and noise traders, as they are considered to be relevant in economics in explaining real market prices. Furthermore, this interactive market model is a natural generalization of the geometric Brownian motion. Of course the model has to be bubble-prone to be realistic. The market model will be analyzed as well as the effects of linear feedback strategies and trading restrictions on the price. A way to calculate thresholds for the parameters to cause bubbles is provided. To conclude the work, backtesting on real market data is performed. I. MOTIVATION AND INTRODUCTIONIn recent years, a lot of papers about the use of feedbackbased trading strategies on financial markets, e.g. [4] and [5], were published. Therein, control theoretical ideas, well known in the engeneering sciences, have been adapted to financial market models. Trading strategies, i.e., the amount of bought and sold shares at each point of time, are defined without any assumptions about the market model, like the geometric Brownian motion or other stochastic models, and no enterprise data or business information is considered, thus, pure feedback strategies are applied. These methods are covered by the term "technical analysis". With this, remarkable results may be shown like, for example, the existence of arbitrage opportunities, see [3]. For obtaining these results, among a few technical assumptions also the so-called price taker property is assumed, which means, that one's own trading does not influence the price. This is, of course, a justified supposition if small investors are regarded, but usually these small investors do not use feedback strategies, as this would exceed their capabilities. However, controlbased trading is used by large investors like funds, which violate the price-taker assumption.The work at hand provides a market model which does not only allow prices to be influenced by the traders but also that the price is determined by the traders' buying and selling decisions. The model will be discussed and different trading strategies will be established. All traders influence the price process and possibly, indirectly each other, too.The author is with Faculty of Mathematics, Physics and Computer Science, University of Bayreuth, 95447 Bayreuth, Germany michael.baumann@uni-bayreuth.de An important ingredient of our model are the so-called noise traders...

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Exchange Rate Dynamics in a Target Zone - A Heterogeneous Expectations Approach

Cited by 20 publications

References 108 publications

Exchange rate expectations of chartists and fundamentalists

Exchange rate expectations of chartists and fundamentalists

Optimal monetary policy in a new Keynesian model with animal spirits and financial markets

Effects of linear feedback trading in an interactive market model

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