Foreign Exchange Markets
Non-fundamental influences

Recent research has examined the role of `non-fundamentalist' speculators in asset markets. In Discussion Paper No. 341, Helen Allen and Research Fellow Mark Taylor present empirical evidence on the nature and perceived importance of `chartist' analysis in the London foreign exchange market. A questionnaire survey of chief foreign exchange dealers suggests that a majority use at least some chartist input, especially at shorter time horizons. Charts and fundamentals appear to be used largely as complementary, not competing, methods of analysis.
Analysis of data on a panel of chartists' one-week- and four-week-ahead exchange rate predictions reveal that, though predictions are far from homogeneous, the most accurate out-perform a whole range of exchange rate forecasting methods, including a random walk. Econometric tests reveal a tendency for inelastic expectations, i.e. predictions do not systematically over-react to current exchange rate changes. Chartist advice is not intrinsically destabilizing to the market, Allen and Taylor conclude, but it should not be ignored.

This Bulletin contains a report of a lunchtime meeting at which Mark Taylor discussed these results.

Charts, Noise and Fundamentals: A Study of the London Foreign Exchange Market
Helen Allen and Mark P Taylor

Discussion Paper No. 341, September 1989 (IM)