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Two Are Better than One?

This paper uses Markov-switching specifications to create a hybrid model with time-varying loading on each of chartist and fundamentalist approaches. The empirical data include the U.S. dollar exchange rates of four Asian tiger countries’ currencies including NTD, SGD, HKD and KOW from 1980 to 2000. Our empirical findings are consistent with the following notions. First, the forecasting performances of the hybrid model with time-varying weight outperform each technique and the random walk model in all cases. Moreover, the state of chartist (fundamentalist) is associated with the low (high) volatility measure.