Economic Fundamentals Over Long and Short Horizons
Economic Fundamentals Over Long and Short Horizons

Summary/Abstract: In this paper, the idea that economic fundamentals should hold over all horizons is put to the test by focusing on the dynamics of the foreign exchange market. An empirical proof that the foreign exchange market follows economic fundamentals over long horizons but not over short horizons is presented. This can be generalized to other markets such as stocks or commodities, which are mostly driven by speculations and investors’ expectations over short horizons but follow economic fundamentals over long horizons. This is especially true for highly volatile assets where the high volatility masks the economic fundamentals over the short run.

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