Abstract
Abstract This paper shows that exchange rate dynamics and speculators' horizons are determined simultaneously. A speculator's horizon choice depends on exchange rate dynamics, since these determine the risks and returns associated with speculative activity. These risks and returns, in turn, are affected by speculators' horizons. For example, a shift of speculators from short to long horizons reduces exchange rate variability at the longer horizon relative to its variability at the shorter horizon. The paper finds that the equilibrium share of short-term speculators depends on a number of factors, including market liquidity and the generating processes of the underlying shocks. The paper also shows that there may be no a priori reason for society to prefer that speculators operate at any particular horizon.
Published Version
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