The role of fundamentalists and technicians in the foreign exchange market when the domestic currency is pegged to a basket

The exchange rate of the Kuwaiti dinar against the Japanese yen is modelled in terms of the activities of fundamentalists and technicians as well as the effect of the exchange rate arrangement. The results show that market forces, as represented by the activities of traders, play a role in the determination of the exchange rate although this role is secondary to the effect of the exchange rate arrangement as represented by changes in the exchange rate of the Kuwaiti dinar against the US dollar. Non-nested model selection tests reveal that models that are based on market forces only or the exchange rate arrangement only are misspecified. There is some evidence indicating that the activity of technicians is more important for this process than the activity of fundamentalists.