Two Essays on the Exchange Rate Disconnect Puzzle

Two Essays on the Exchange Rate Disconnect Puzzle

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The two essays of the dissertation address the exchange rate disconnect puzzle from a new point of view. The first essay looks at secularly popular technical analysis and test whether these rules have an ability to predict the exchange rate. The essay notes the fact that technical rules forecast only the future 'direction' of exchange rate movements. Accordingly, by decomposing the movements into three pieces---activity (whether it moved or not), direction (if moved, which direction it moved), and size (by how much it moved)---the study shows that the forecast of technical rules pertaining to the direction of exchange rate movements is, at best, a fair game. In contrast, the absolute 'size' of exchange rate movements is positively related to the aggregate signal of the rules. The combined outcome is the increased price oscillation. Consequently, herding or contrarian trading strategy, which time investment decision to the dictation of these technical rules, do not necessarily improve traders' ability to predict future exchange rate movements.First, the exchange market is mainly driven by market makers3 who account for 86 percent of overall trading volume (BIS, 2005) and often attune themselves to the metronome of technical analysis. Yen/dollar exchange rate is chosen not only anbsp;...

Title:Two Essays on the Exchange Rate Disconnect Puzzle
Author:Chul Ho Park
Publisher:ProQuest - 2007


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