The role of heterogeneous expectations in forward exchange market

Xiaoping Li, Chunyang Zhou and Chongfeng Wu

Applied Economics Letters, 2013, vol. 20, issue 5, 471-475

Abstract: We build a Markov regime switching model to examine the role of heterogeneous expectations in the forward exchange market, where the regime could be fundamentalists or chartists. Our empirical analysis of EUR/USD and USD/JPY forward markets suggest that the fundamen-talists who follow negative feedback rule provide a mean-reverting dynamics into the market, while the chartists who follow positive feedback rule would reinforce the forward exchange rate movement. Finally, we find the chartists tend to switch to fundamentalists when the forward rate deviates away from its equilibrium.

Date: 2013
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DOI: 10.1080/13504851.2012.714061

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