Announcement effects on exchange rates
Mikael Bask ()
International Journal of Finance & Economics, 2009, vol. 14, issue 1, 64-84
An asset pricing model for exchange rate determination is presented, where technical analysis in currency trade is incorporated in the form of a moving average technique. As a result, the model has j max +1 rational expectations equilibria (REE), where j max is large, since j max past exchange rates affect the current rate due to technical analysis. There is, however, a unique REE that is economically relevant, and focusing on this REE, it is shown that the exchange rate is much more sensitive to a change in money supply than when technical analysis is absent in currency trade. This result is important since it sheds light on the so-called exchange rate disconnect puzzle in international finance. Copyright © 2008 John Wiley & Sons, Ltd.
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