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Heterogeneous expectations, exchange rate dynamics and predictability
[journal article]
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... view more
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.... view less
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
https://doi.org/10.1016/j.jebo.2006.08.005
Status
Postprint; peer reviewed
Licence
PEER Licence Agreement (applicable only to documents from PEER project)