Citation

Discussion Paper Details

Please find the details for DP1683 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Heterogeneous Traders and the Unbiasedness Hypothesis: Explaining the Mark/Dollar Bias

Author(s): Nikos Christodoulakis and Sarantis C Kalyvitis

Publication Date: August 1997

Keyword(s): Exchange Rate, Heterogeneous Traders and Market Efficiency

Programme Area(s): International Macroeconomics

Abstract: This paper re-examines the standard ?unbiasedness? hypothesis in foreign exchange markets, according to which the forward premium should be an unbiased predictor of the future change of the spot exchange rate. If traders are heterogeneous, they may consist of ?fundamentalists? who correctly forecast the future spot rate changes, and ?chartists? who use a different information set and pay attention to past exchange rate changes. In this case, the coefficient on the forward premium will deviate from its theoretical value, and will converge to one only if past spot rates are taken into account for the calculation of exchange rate changes and forward premia. The magnitude of the deviation and the speed of convergence are found to depend both on the proportion of each type of traders in the market and on the memory length of ?chartists?. The analysis is used to explain the bias in the Deutsche Mark/US Dollar exchange rate in the early 1990s and estimates the proportion of traders that is found to be consistent with the deviation from the unbiasedness hypothesis.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1683

Bibliographic Reference

Christodoulakis, N and Kalyvitis, S. 1997. 'Heterogeneous Traders and the Unbiasedness Hypothesis: Explaining the Mark/Dollar Bias'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1683