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Heterogeneous expectations, exchange rate dynamics and predictability

[journal article]

Manzan, Sebastiano; Westerhoff, Frank H.

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Please use the following Persistent Identifier (PID) to cite this document:http://nbn-resolving.de/urn:nbn:de:0168-ssoar-199548

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Abstract This paper proposes a simple chartist-fundamentalist model in which we allow for nonlinear time variation in chartists' extrapolation rate. Estimation of the model using monthly data for the major currencies vis-a-vis the US dollar shows that the model is significant in-sample and that it has out-of-sample predictive power for some of the currencies. We investigate the power of tests of the random walk model to detect predictability against the alternative of the proposed model. We find that the evidence of short-term unpredictability and the long-term predictability are consistent with our model.
Classification Political Economy
Free Keywords Exchange rates; Heterogeneous expectations; Forecasting; Nonlinear models
Document language English
Publication Year 2007
Page/Pages p. 111-128
Journal Journal of Economic Behavior & Organization, 64 (2007) 1
DOI http://dx.doi.org/10.1016/j.jebo.2006.08.005
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)