DP4752 The Rise of Fund Managers in Foreign Exchange

Author(s): Thomas Gehrig , Lukas Menkhoff

Publication Date: October 2004

Keyword(s): foreign exchange , market microstructure , fund management , fundamentals

JEL(s): F31 , G23

Programme Areas: Financial Economics

Link to this Page: www.cepr.org/pubs/dps/DP4752.asp

This Paper analyses the behaviour and motivation of fund managers in foreign exchange markets reflected in questionnaire evidence. We find that fund managers and FX dealers differ significantly. Fund managers rely more on fundamentals, basically due to their longer forecasting horizons, and reject non-fundamental influences on exchange rates more than FX dealers. Neither can fund managers be considered as pure fundamentalists, however. Non-fundamentalist positions markedly influence short-term decision-making. They inspire ambivalent views about market imperfections and these views seem to become stronger over time. This latter change counterbalances the strengthening fundamental influences resulting from the rise of fund managers.