Technical Trading and the Volatility of Exchange Rates

37 Pages Posted: 24 Jul 2007

See all articles by Bernhard Herz

Bernhard Herz

University of Bayreuth

Christian Bauer

University of Trier; Universität Trier


The microeconomic structure of foreign exchange markets can cause excessive volatility in flexible exchange rate regimes. The market entry of chartists changes the composition of the foreign exchange market and leads to excessive volatility. Our chartist model predicts a continuum of equilibria and an U-shaped relation between exchange rate volatility and the measured trend, which is supported by the empirical evidence. The data show a positive nonlinear relation between trend and volatility, as predicted by the model. In such a situation monetary policy may be able to smooth the exchange rate without changing macroeconomic fundamentals.

JEL Classification: F31, F33, G15

Suggested Citation

Herz, Bernhard and Bauer, Christian, Technical Trading and the Volatility of Exchange Rates. Review of Quantitative Finance and Accounting, Vol. 4, No. 4, 2004, Available at SSRN:

Bernhard Herz (Contact Author)

University of Bayreuth ( email )

Universitatsstr 30
Bayreuth, D-95447

Christian Bauer

University of Trier ( email )

15, Universitaetsring
Trier, 54286

Universität Trier ( email )


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