Chartism in the foreign exchange market
This thesis examines the use and nature of chartism in the foreign exchange market, bringing together an analysis of chartist methods and the views/empirical work of economics. A survey of general chartist methods demonstrates the origins of the modern techniques, the construction of the various indicators, the use of pattern recognition and the variety of calculated indices. Despite these methods being widely used in the market, there seems to be very little bridging between practical chartism and the many fundamental-based academic studies of exchange rate determination/forecasting. Key points of the academic literature which have features pertinent to non-fundamental chart analysis are therefore discussed, and what little explicit analysis of chartism has been done is highlighted. It is clear that analysis of the subject is a growing area of the literature. It transpires, however, that there is minimal actual evidence available about the use of chartism in practice. To provide information on this, a questionnaire survey was conducted to examine the extent to, and manner by which, chartism is used in the (London) foreign exchange market and how it is perceived by the market participants themselves. This gives clear information on the extent of chartist advice in the market and the wide variety of techniques used, along with insights into the differing views held by market participants on the subject. While something of a broad consensus emerges regarding the possible methods and the weights given to charts at differing time horizons, there is sufficient heterogeneity in general to suggest that differences of views will be transmitted in actual chartists advice. To test this directly, a database of chartists' forecasts was constructed by a telephone survey of a panel of chartists, to compile their one and four week ahead predictions for the three major bilateral rates. This gives a unique data set, from which it is possible to analyse the forecasts of individuals as well as the median forecast. The data is subjected to a battery of tests and comparisons, a recurring result of which is indeed the apparent difference in accuracy between individual chartists. For example comparisons with a range of other forecasting techniques (economic and statistical), show some chartists under-perform these consistently while the best are even able to outperform a random walk. Tests of the implied expectations mechanism reveal that the hypothesis of rationality of chartism cannot be entirely rejected over the short horizon, but that there is stronger evidence of irrationality over the four week period, a result which becomes more pronounced as the information set is expanded, which provides evidence against the chartist tenet that 'the price discounts everything'. Testing for different methods of expectation formation reveals that in general the hypothesis of static expectations cannot be rejected against the variety of afternatives considered. Overall, the crucial result in this area was that of an inelasticity of expectations: chartists' advice does not appear to exert a destabilising on the foreign exchange market by overreacting systematically to changes in the current rate. In sum, this thesis forms a bridge between chartism and economics, by examining the methods and results of the former and analysing them with the tools of the latter.