An Empirical Examination of Heterogeneity and Switching in Foreign Exchange Markets

Using a unique dataset of survey expectations, this paper examines the extent to which the classical fundamentalist – chartist dichotomy is valid for the foreign exchange market. By applying a recursive selection algorithm 1) respondents are classified into the two groups, and 2) the forecasting models are endogenously determined within the groups. We find that the largest part of the variation in expectations can be explained by the fundamentalist/chartist distinction. The majority of respondents use a simple chartist rule, while fundamentalists use a broad range of macro-economic information.