Dispersion of Beliefs in the Foreign Exchange Market

Christian Wolff, Ron Jongen (), Willem Verschoor and Remco Zwinkels ()
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Ron Jongen: Erasmus School of Economics, Erasmus University Rotterdam

LSF Research Working Paper Series from Luxembourg School of Finance, University of Luxembourg

Abstract: This paper analyzes the sources of the differential beliefs of market participants in the foreign exchange market and their relative role in forming exchange rate expectations. We find that there are distinct periods of high and low dispersion and document that dispersion arises because of a combined effect of market participants holding individual information and attach different weights to some elements of the common information set. In addition to these two effects, we also document evidence of the existence of different types of agents and find that chartist rules are predominantly used at the shorter spectrum of the forecast horizon and fundamentalist rules are predominantly used at the longer spectrum of the forecast horizon. Finally, our evidence suggests that the relationship between market volatility and trader dispersion tends to be significant and positive for different measures of both trader heterogeneity and market volatility.

Keywords: Exchange rate expectations; heterogeneity; dispersion of beliefs; bounded rationality; tail behavior; survey data. (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-cba and nep-ifn
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Related works:
Working Paper: Dispersion of Beliefs in the Foreign Exchange Market (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:crf:wpaper:09-01

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