Heterogeneous expectations in the foreign exchange market - Evidence from daily DM/US Dollar exchange rates

In this study a regime-switching approach is applied to estimate the chartist and fundamentalist (cIf) exchange rate model originally proposed by Frankel and Froot (1986). The cIf model is tested against alternative regime-switching specifications applying likelihood ratio tests. Nested atheoretical models like the popular segmented trends model suggested by Engel and Hamilton (1990) are rejected in favour of the multi-agent model. Our findings turned out to be relatively robust when assessing the models' sub-sample estimates and out-of-sample performance.