The exchange rate in a model with heterogeneous agents and transactions costs.

Cost; Costs; Exchange; Model; Working;

Bubbles and crashes in a behavioural finance model.

Finance; Model; Working;

Bubbles and Crashes in a Behavioural Finance Model

We develop a simple model of the exchange rate in which agents optimize their portfolio and use different forecasting rules. They check the profitability of these rules ex post and select the more profitable one. This model produces two kinds of equilibria, a fundamental and a bubble one. In a stochastic environment the model generates a complex dynamics in which bubbles and crashes occur at unpredictable moments. We contrast these "behavioural" bubbles with "rational" bubbles.exchange rate, bounded rationality, heterogeneous agents, bubbles and crashes, complex dynamics

The Exchange Rate in a Model with Heterogeneous Agents and Transactions Costs

In this paper we develop a model of the exchange rate. The existence of transactions costs introduces an important non-linearity. Agents have different beliefs about the future exchange rate. We show that this simple model creates great complexity in the market which is characterised by the fact that the exchange rate is disconnected from its fundamental most of the time. Periods of tranquility and turbulence alternate in unpredictable manner. Finally we show that this model mimicks most of the empirical puzzles uncovered in the literature.

The Exchange Rate and its Fundamentals. A Chaotic Perspective

We analyse the workings of a simple non-linear exchange rate model in which agents hold different beliefs about the underlying model. We distinguish between ‘chartists’ and ‘fundamentalists’. The non-linearities in the model originate from transactions costs and from the existence of non-linear adjustment dynamics in the goods market. We find, first, that the simple non-linear structure of the model is capable of generating a very complex exchange rate dynamics. Second, our model is capable of explaining some empirical puzzles concerning exchange rate behaviour, i.e. the ‘disconnect’ puzzle which says that the exchange rate is disconnected form its underlying fundamentals most of the time and the excess volatility puzzle.

Bubbling and crashing exchange rates.

Exchange; Exchange rates; Working;

Fundamental and non-fundamental equilibria in the foreign exchange market. A behavioural framework.

Equilibrium; Exchange; Foreign exchange; Framework; Market; Working;

The impact of FX Central Bank intervention in a noise trading framework.

Framework; Impact; Noise; Working;

The Impact of FX Central Bank Intervention in a Noise Trading Framework

In this paper we investigate the effects of central bank interventions (CBI) in a noise trading model with chartists and fundamentalists. We first estimate a model in which chartists extrapolate past returns and fundamentalists forecast a mean reverting dynamics of the exchange rate towards a fundamental value. Then, we investigate the role of central bank interventions in explaining the switching properties between the two types of agents. We find evidence that in the medium run, interventions increase the proportion of fundamentalists and therefore exert some stabilizing influence on the exchange rate.

Fundamental and Non-Fundamental Equilibria in the Foreign Exchange Market. A Behavioural Finance Framework

We develop a simple model of the exchange rate in which agents optimize their portfolio and use different forecasting rules. They check the profitability of these rules ex post and select the more profitable one. This model produces two kinds of equilibria, a fundamental and a bubble one. In a stochastic environment the model generates a complex dynamics in which bubbles and crashes occur at unpredictable moments. We contrast these ”behavioural” bubbles with ”rational” bubbles.exchange rate, bounded rationality, heterogeneous agents, bubbles and crashes, complex dynamics, basins of attraction