Abstract
We investigate the impact of chartists on exchange rate dynamics and their role in the context of two major empirical puzzles: the forward premium anomaly and the excess volatility puzzle. By extending a microstructure-motivated nonlinear model of uncovered interest parity (UIP), we provide evidence that chartists contribute to a time-varying forward bias with UIP deviations being bounded by limits to speculation. Furthermore, we find that - consistent with research on the excess volatility puzzle - chartist activity leads to higher exchange rate volatility.
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