The Foreign Exchange Market: A Random Walk with a Dragging Anchor

Charles Goodhart

255 citations0/0 files storedEconomica

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Abstract

This paper explores some anomalies in the foreign exchange market. It is hard to find evidence of either short-term overshooting or of longer-term reversion to an equilibrium. The forward exchange rate contains virtually no information on future spot rates. Discussions with practitioners indicate that longer-term speculation based on fundamentals is strictly limited, and survey data and other evidence suggest that expectations and speculation are based on a variety of models. The interplay between speculation based on fundamentals, and on a random walk, or Chartist, approach, influences the outcome. This endorses the prior model of J. A. Frankel and K. A. Froot. Copyright 1988 by The London School of Economics and Political Science.

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References

1976Expectations and Exchange Rate Dynamics 1983Forward Rates and Future Policy: Interpreting the Term Structure of Interest Rates 1988An empirical examination of long-run purchasing power parity using cointegration techniques 1986Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations

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1998The socio-economic dynamics of speculative markets: interacting agents, chaos, and the fat tails of return distributions 2000Agent-based computational finance: Suggested readings and early research 2006Chapter 23 Heterogeneous Agent Models in Economics and Finance 1998The use of fundamental and technical analyses by foreign exchange dealers: Hong Kong evidence 1994Bid—ask spreads and volatility in the foreign exchange market 1990Currency Fluctuations in the Post-Bretton Woods Era 1997A simultaneous trade model of the foreign exchange hot potato 1997Informed Traders, Intervention, and Price Leadership: A Deeper View of the Microstructure of the Foreign Exchange Market

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