Expectation formation mechanisms, profitability of foreign exchange trading and exchange rate volatility

Title: Expectation formation mechanisms, profitability of foreign exchange trading and exchange rate volatility
Creator: Moosa, Imad A.; Shamsuddin, Abul
Relation: Applied Economics Vol. 36, Issue 14, p. 1599-1606
Publisher Link: http://dx.doi.org/10.1080/0003684042000217977
Publisher: Routledge
Resource Type: journal article
Date: 2004
Description: An attempt is made to identify the expectation formation mechanism dominating the foreign exchange market and to demonstrate that exchange rate volatility can be attributed to the heterogeneity of traders with respect to expectation formation. The criterion used to identify the dominance of a particular mechanism is the profitability of trading based on that mechanism. It is concluded that mixed and extrapolative expectations are the dominant mechanisms, that market participants follow some sort of a herd behaviour, and that they pay attention to the expectations of other participants. It is also found that the heterogeneity of market participants with respect to expectation formation goes a long way towards explaining volatility.
Subject: expectation formation mechanisms; profitability; foreign exchange; trading; exchange rate
Identifier: uon:1931
Identifier: http://hdl.handle.net/1959.13/27705
Identifier: ISSN:0003-6846
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