# Fundamentals and Technical Trading: Behavior of Exchange Rates in the CEECs

Research Article

First Online:

- 116 Downloads
- 2 Citations

## Abstract

We incorporate technical trading into the monetary approach to exchange rates, and estimate the model for four Central and Eastern European countries that introduced the policy of free floating in the late 1990s; the Czech Republic, Hungary, Poland and Slovakia. We find that past exchange rates contribute significantly to the determination of the spot exchange rate. We also find a feedback behavior driving the exchange rate to its fundamental value although the mean reversion parameter is small. Overall, this means that these currency markets have developed a complex structure of different trader types, which already is documented for developed countries.

## Keywords

Autoregression Foreign exchange Fundamental analysis Mean reversion Technical analysis## JEL Classification

C32 F31 F36## References

- Andrews DWK, Zivot E (1992) Further evidence on the great crash, the oil-price shock, and the unit-root hypothesis. J Bus Econ Stat 10:251–270CrossRefGoogle Scholar
- Artis MJ, Marcellino M, Proietti T (2003) Dating the Euro area business cycle. Discussion Paper No. 3696. CEPR, LondonGoogle Scholar
- Bask M (2007) Chartism and exchange rate volatility. Int J Financ Econ 12:301–316CrossRefGoogle Scholar
- Bask M (2008a) Adaptive learning in an expectational difference equation with several lags: selecting among learnable REE. Eur Financ Manag 14:99–117Google Scholar
- Bask M (2008b) Announcement effects on exchange rates. Int J Financ Econ (in press)Google Scholar
- Bauer C, Herz B (2007) Credibility of CIS exchange rate policies – a technical trader’s view. Emerging Markets Review 8:50–66CrossRefGoogle Scholar
- Brock WA, Hommes CH (1997) A rational route to randomness. Econometrica 65:1059–1095CrossRefGoogle Scholar
- Cheung Y-W, Chinn MD (2001) Currency traders and exchange rate dynamics: a survey of the US market. J Int Money Financ 20:439–471CrossRefGoogle Scholar
- Cheung Y-W, Chinn MD, Pascual AG (2005) Empirical exchange rate models of the nineties: are any fit to survive? J Int Money Financ 24:1150–1175CrossRefGoogle Scholar
- Cheung Y-W, Lai KS (1993) Finite-sample sizes of Johansen’s likelihood ratio tests for cointegration. Oxf Bull Econ Stat 55:313–328Google Scholar
- Chmelarova V, Schnabl G (2006) Exchange rate stabilization in developed and underdeveloped capital markets. Working Paper No. 636. European Central Bank, FrankfurtGoogle Scholar
- Crespo-Cuaresma J, Fidrmuc J, MacDonald R (2005) The monetary approach to exchange rates in the CEECs. Econ Transit 13:395–416CrossRefGoogle Scholar
- Crespo-Cuaresma J, Fidrmuc J, Silgoner MA (2008) Fundamentals, the exchange rate and prospects for the current and future EU enlargements: evidence from Bulgaria, Croatia, Romania and Turkey. Empirica 35:195–211CrossRefGoogle Scholar
- Crespo-Cuaresma J, Hlouskova J (2005) Beating the random walk in central and eastern Europe. J Forecast 24:189–201CrossRefGoogle Scholar
- De Grauwe P, Grimaldi M (2006) The exchange rate in a behavioral finance framework. Princeton University Press, PrincetonGoogle Scholar
- De Long JB, Shleifer A, Summers LH, Waldmann RJ (1990) Noise trader risk in financial markets. J Polit Econ 98:703–738CrossRefGoogle Scholar
- Égert B, Halpern L (2006) Equilibrium exchange rates in central and eastern Europe: a meta-regression analysis. J Bank Financ 30:1359–1374CrossRefGoogle Scholar
- Égert B, Jiménez-Rodríguez R, Kočenda E, Morales-Zumaquero A (2006) Structural changes in central and eastern European economies: breaking news or breaking the ice? Econ Change Restruct 39:85–103CrossRefGoogle Scholar
- Elliott G, Rothenberg TJ, Stock JH (1996) Efficient tests for an autoregressive unit root. Econometrica 64:813–836CrossRefGoogle Scholar
- Evans GW, Honkapohja S (2001) Learning and expectations in macroeconomics. Princeton University Press, PrincetonGoogle Scholar
- Fidrmuc J (2008) Money demand and disinflation in selected CEECs during the accession to the EU. Appl Econ (in press)Google Scholar
- Fidrmuc J, Horváth R (2008) Volatility of exchange rates in selected new EU members: evidence from daily data. Econ Syst 32:103–118CrossRefGoogle Scholar
- Frankel JA, Froot KA (1986) Understanding the US dollar in the eighties: the expectations of chartists and fundamentalists. Econ Rec S62:24–38Google Scholar
- Friedman M (1953) The case of flexible exchange rates. In: Friedman M (ed) Essays in positive economics. University of Chicago Press, Chicago, pp 3–43Google Scholar
- Gehrig T, Menkhoff L (2006) Extended evidence on the use of technical analysis in foreign exchange. Int J Financ Econ 11:327–338CrossRefGoogle Scholar
- Hamilton JD (1994) Time series analysis. Princeton University Press, PrincetonGoogle Scholar
- Hanousek J, Filer RK (2000) The relationship between economic factors and equity markets in central Europe. Econ Transit 8:623–638CrossRefGoogle Scholar
- Hommes CH (2006) Heterogeneous agent models in economics and finance. In: Tesfatsion L, Judd KL (eds) Handbook of computational economics, vol 2. Agent-based computational economics. Elsevier/North-Holland, Amsterdam, pp 1109–1186Google Scholar
- Ito T, Yabu T (2007) What prompts Japan to intervene in the forex market? A new approach to a reaction function. J Int Money Financ 26:193–212CrossRefGoogle Scholar
- Kirman A (1993) Ants, rationality, and recruitment. Q J Econ 108:137–156CrossRefGoogle Scholar
- Lui Y-H, Mole D (1998) The use of fundamental and technical analyses by foreign exchange dealers: Hong Kong evidence. J Int Money Financ 17:535–545CrossRefGoogle Scholar
- Kočenda E, Valachy J (2006) Exchange rate volatility and regime change: visegrad comparison. J Comp Econ 34:727–753CrossRefGoogle Scholar
- MacDonald R, Wójcik C (2004) Catching up: the role of demand, supply and regulated price effects on the real exchange rates of four accession countries. Econ Transit 12:153–179CrossRefGoogle Scholar
- McCallum BT (1983) On non-uniqueness in rational expectations models: an attempt at perspective. J Monet Econ 11:139–168CrossRefGoogle Scholar
- Meese RA, Rogoff KS (1983) Empirical exchange rate models of the seventies: do they fit out of sample? J Int Econ 14:3–24CrossRefGoogle Scholar
- Menkhoff L (1997) Examining the use of technical currency analysis. Int J Financ Econ 2:307–318CrossRefGoogle Scholar
- Neely CJ (1997) Technical analysis in the foreign exchange market: a layman’s guide. Federal Reserve Bank of St. Louis Review 79(5):23–38Google Scholar
- Oberlechner T (2001) Importance of technical and fundamental analysis in the European foreign exchange market. Int J Financ Econ 6:81–93CrossRefGoogle Scholar
- Oberlechner T (2004) The psychology of the foreign exchange market. Wiley, West SussexGoogle Scholar
- Pramor M, Tamirisa NT (2006) Common volatility trends in the central and eastern European currencies and the euro. Working Paper No. 6/2006. IMF, WashingtonGoogle Scholar
- Taylor MP, Allen H (1992) The use of technical analysis in the foreign exchange market. J Int Money Financ 11:304–314CrossRefGoogle Scholar
- Wong H, Li WK, Ling S (2005) Joint modeling of cointegration and conditional heteroscedasticity with applications. Ann Inst Stat Math 57:83–103CrossRefGoogle Scholar
- Zeeman EC (1974) On the unstable behaviour of stock exchanges. J Math Econ 1:39–49CrossRefGoogle Scholar

## Copyright information

© Springer Science+Business Media, LLC 2008