Article Preview
Top2. Literature Review
“The technical approach to investment is essentially a reflection of the idea that prices move in trends which are determined by the changing attitudes of investors toward a variety of economic, monetary, political and psychological forces” (Pring, 1991).Another approach which is rather different from technical approach is fundamental analysis. The assumption of the fundamental analysis approach is that at any point in time an individual security has an intrinsic value which depends on the fundamentals of the security (Fama, 1965).
Prices can exhibit substantial short-run deviations from fundamentals due to the role of market sentiment, noise traders and limits to arbitrage (Coakley et al., 2006).Models based on economic fundamentals have been poor at explaining the movements in the exchange rates (Meese, 1990). In the Post-war period, financial economists have treated technical analysis with scepticism (Malkiel, 1985; Sharpe, 1985).
As per Keynes (Keynes, 1936) financial markets are also influenced by non-fundamental factors. Any general analysis of exchange rates examines underlying economic fundamentals to explain the movements in the exchange rates, but there were situations where current fundamentals based models fail to explain the past completely, or forecast the future reliably (Dornbusch,(1976, 1987); Frankel etal., (1986, 1990a), suggest that technical analysis could have largely been responsible for the overvaluation of US dollar during the 1980’s, during which period, pressure in the opposite direction was signaled by the economic fundamentals.
Because of such failures, academicians and researchers have started to look into the role of non-fundamental factors influencing financial markets. Non-price information creates the opportunity. The past prices serve only to aid its efficient exploitation (Treynor et al., 1984).Allen et al., (1990) in their paper provides some empirical evidence concerning the nature and perceived importance of one particular kind of non- fundamentalist analysis namely chartism, in the London foreign exchange market. In questionnaire survey conducted in Germany, among professional foreign exchange market participants found that rational participants use non-fundamental analysis to exploit less rational noise traders (Menkhoff, 1998).