Heterogeneous Expectations in the Foreign Exchange Market Evidence from the Daily Dollar/DM Exchange Rate

Arbeitspapier

In this study a regime switching approach is applied to estimate the chartist and fundamentalist (c&f) exchange rate model originally proposed by Frankel and Froot (1986). The c&f model is tested against alternative regime switching specifications applying likelihood ratio tests. Nested atheoretical models like the popular segmented trends model suggested by Engel and Hamilton (1990) are rejected in favour of the multi agent model. Moreover, the c&f regime switching model seems to describe the data much better than a competing regime switching GARCH(1,1) model. Finally, our findings turned out to be relatively robust when estimating the model in subsamples. The empirical results suggest that the model is able to explain daily DM/Dollar forward exchange rate dynamics from 1982 to 1998.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CFS Working Paper ; No. 2003/11

Classification and Topics

• Classification: Wirtschaft ; Foreign Exchange ; Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models ; Asset Pricing; Trading Volume; Bond Interest Rates ; International Financial Markets
• Subject: exchange rates ; multi agent models ; regime-switching

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Ahrens, Ralf ; Reitz, Stefan
• Event: Veröffentlichung
• (who): Goethe University Frankfurt, Center for Financial Studies (CFS)
• (where): Frankfurt a. M.
• (when): 2003

Further information

• Handle: http://hdl.handle.net/10419/72646
• URN: urn:nbn:de:hebis:30-10176
• Last update: 10.03.2025, 11:43 AM CET