Technical trading, monetary policy, and exchange rate regimes : Some empirical evidence

Title data

Bauer, Christian ; Herz, Bernhard:
Technical trading, monetary policy, and exchange rate regimes : Some empirical evidence.
In: Global Finance Journal. Vol. 15 (2005) Issue 3 . - pp. 281-302.
ISSN 1044-0283
DOI: https://doi.org/10.1016/j.gfj.2004.07.002

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Abstract in another language

The paper extends and empirically tests the noise trader exchange rate model of Jeanne and Rose (2002). We introduce technical trading in the exchange market as a source of noise and explicitly incorporate monetary and exchange rate policy. With these modifications, it is possible to directly test the model's prediction of an U-shaped relation between exchange trend and volatility. We find strong empirical evidence supporting the implications of the model. As a corollary, we develop a measure of excess exchange rate volatility and categorize exchange rate regimes based on the de facto behavior of the exchange rates.