DP621 Psychological Barriers in the Foreign Exchange Market

Author(s): Paul De Grauwe, Danny Decupere
Publication Date: January 1992
Keyword(s): Exchange rate, Market efficiency, Psychological barriers
JEL(s): 430, 431
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=621

This paper undertakes an empirical analysis of the existence of psychological barriers in the dollar/DM and the dollar/yen exchange markets. Psychological barriers occur when agents attach some special importance to the last trailing digits of the price of an asset or a currency. Our empirical results indicate that psychological barriers exist and are significant in the dollar-yen market. Market exchange rates tend to resist movements towards numbers such as 130, 140, ... yen per dollar etc. In addition, once these barriers have been crossed, exchange rates accelerate away from them. The evidence of psychological barriers in the dollar/DM market is less clear-cut.