An Empirical Investigation of Heterogeneity and Switching in the Foreign Exchange Market

Remco Zwinkels, D Goldbaum

Research output: Contribution to journalArticleAcademicpeer-review

19 Citations (Scopus)

Abstract

In order to study the expectation formation of financial institutions in the foreign exchange market we develop and apply a recursive selection and estimation algorithm to a dataset of surveyed foreign exchange market expectations. Responses are classified into two groups and forecasting models are endogenously determined within the groups. Estimation results reveal that a fundamentalist–chartist model is capable of explaining a large portion of foreign exchange market expectations. Fundamentalists are found to have mean-reverting expectations whereas chartists have contrarian expectations. Allowing panelists to switch between models significantly improves the fit of the model, especially at the relatively shorter forecast horizons. We find that the fundamentalist model is increasingly used as the forecast horizon extends. Finally, results indicate that model choice is based on a combination of period-specific and individual-specific determinants.
Original languageEnglish
Pages (from-to)667-684
Number of pages18
JournalJournal of Economic Behavior and Organization
Volume107
Issue numberPart B
DOIs
Publication statusPublished - 2014

Fingerprint

Dive into the research topics of 'An Empirical Investigation of Heterogeneity and Switching in the Foreign Exchange Market'. Together they form a unique fingerprint.

Cite this