Nonlinearities and Cyclical Behavior: The Role of Chartists and Fundamentalists
AbstractWe develop a behavioral exchange rate model with chartists and fundamentalists to study cyclical behavior in foreign exchange markets. Within our model, the market impact of fundamentalists depends on the strength of their belief in fundamental analysis. Estimation of a STAR GARCH model shows that the more the exchange rate deviates from its fundamental value, the more fundamentalists leave the market. In contrast to previous findings, our paper indicates that due to the nonlinear presence of fundamentalists, market stability decreases with increasing misalignments. A stabilization policy such as central bank interventions may help to deflate bubbles.
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Bibliographic InfoArticle provided by De Gruyter in its journal Studies in Nonlinear Dynamics & Econometrics.
Volume (Year): 7 (2003)
Issue (Month): 4 (December)
Contact details of provider:
Web page: http://www.degruyter.com
Other versions of this item:
- Reitz, Stefan & Westerhoff, Frank, 2003. "Nonlinearities and Cyclical Behavior: The Role of Chartists and Fundamentalists," CFS Working Paper Series 2003/10, Center for Financial Studies (CFS).
- F31 - International Economics - - International Finance - - - Foreign Exchange
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
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