Journal of Applied Finance & Banking

Exchange Rate Determination: Which Is Appropriate, Chartist model or Fundamental Model?

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  • Abstract

    This article reports the findings of an exchange rate determination model based on either the traditional chartist or the fundamental model. Much dispute has surrounding exchange rate determination and many theories have been offered; however, market participants use and rely on the chartist model and academics rely on various economic variables (i.e., fundamental variables) in general. The monetary approach is sometimes used by persons in the field along with purchasing power parity hypothesis, the asset market approach, and so on. This article introduces both chartist and fundamental models and assumes that market participants are rational and can learn from mistakes. These participants check the profitability of the rule and compare it to other available rules. If they discover that the rule is less profitable, they consider a switch to the better rule. If they find otherwise, they stick to the initial rule. Using the dollar-Japanese yen exchange rate for 2010-2012, this article examines the appropriateness of this hybrid model, which fits well with the reality. This article shows that this rational- fundamentalist-chartist hybrid model can account for movements in the exchange rate.