NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Exchange Rate Forecasting Techniques, Survey Data, and Implications for the Foreign Exchange Market

Jeffrey A. Frankel, Kenneth Froot

NBER Working Paper No. 3470
Issued in October 1990
NBER Program(s):   ME   ITI   IFM

The paper presents new empirical results that elucidate the dynamics of the foreign exchange market. The first half of the paper is an updated study of the exchange rate expectations held by market participants, as reflected in responses to surveys, and contains the following conclusions. First, the bias observed in the forward discount as a predictor of the future spot rate is not attributable to an exchange risk premium, as is conventionally believed. Second, at short horizons forecasters tend to extrapolate recent trends, while at long horizons they tend to forecast a reversal. Third, the bias in expectations is robust in the samples, based on eight years of data across five currencies. The second half of the paper abandons the framework in which all market participants share the same forecast, to focus on the importance of heterogeneous expectations. Tests suggest that dispersion of opinion, as reflected in the standard deviation across respondents in the survey, affects the volume of trading in the market, and, in turn, the degree of volatility of the exchange rate. An example of how conflicting forecasts can lead to swings in the exchange rate is the model of "chartists and fundamentalists." The market weights assigned to the two models fluctuate over time in response to recent developments, leading to fluctuations in the demand for foreign currency. The paper ends with one piece of evidence to support the model: the fraction of foreign exchange forecasting services that use "technical analysis" did indeed increase sharply during 1983-85, but declined subsequently.

download in pdf format
   (991 K)

email paper

This paper is available as PDF (991 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w3470

Published: Published as "Chartists, Fundamentalists, and Trading in the Foreign Exchange Market" , American Economic Review, Vol. 80, no. 2 (1990): 181-185.

Users who downloaded this paper also downloaded these:
Ito w2679 Foreign Exchange Rate Expectations: Micro Survey Data
Mussa The Theory of Exchange Rate Determination
Evans and Lyons w11042 Meese-Rogoff Redux: Micro-Based Exchange Rate Forecasting
Rogoff and Stavrakeva w14071 The Continuing Puzzle of Short Horizon Exchange Rate Forecasting
Chinn and Frankel w3807 Patterns in Exchange Rate Forecasts for 25 Currencies
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us