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Heterogeneity of agents and exchange rate dynamics: Evidence from the EMS

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  • de Jong, Eelke
  • Verschoor, Willem F.C.
  • Zwinkels, Remco C.J.

Abstract

We develop and estimate a dynamic heterogeneous agent model for the EMS period. Our empirical results suggest that the existence of heterogeneous interacting agents is indeed a possible explanation for the dynamics of exchange rates during the EMS. We find strong evidence of heterogeneous boundedly rational beliefs, and the fact that agents switch between these beliefs. Moreover, we show that the dynamic heterogeneous agent model outperforms the random walk and the static heterogeneous agents' model in out-of-sample forecasting in the large majority of country-horizon combinations.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 29 (2010)
Issue (Month): 8 (December)
Pages: 1652-1669

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Handle: RePEc:eee:jimfin:v:29:y:2010:i:8:p:1652-1669

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Web page: http://www.elsevier.com/locate/inca/30443

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Keywords: Heterogeneous expectations The European Monetary System Non-linear modelling Agent-based finance;

References

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Cited by:
  1. Wilko Bolt & Maria Demertzis & Cees Diks & Marco van der Leij, 2011. "Complex Methods in Economics: An Example of Behavioral Heterogeneity in House Prices," DNB Working Papers 329, Netherlands Central Bank, Research Department.
  2. Jongen, Ron & Verschoor, Willem F.C. & Wolff, Christian C.P. & Zwinkels, Remco C.J., 2012. "Explaining dispersion in foreign exchange expectations: A heterogeneous agent approach," Journal of Economic Dynamics and Control, Elsevier, vol. 36(5), pages 719-735.
  3. Carl Chiarella & Xue-Zhong He & Weihong Huang & Huanhuan Zheng, 2011. "Estimating Behavioural Heterogeneity Under Regime Switching," Research Paper Series 290, Quantitative Finance Research Centre, University of Technology, Sydney.
  4. Baur, Dirk G. & Glover, Kristoffer J., 2014. "Heterogeneous expectations in the gold market: Specification and estimation," Journal of Economic Dynamics and Control, Elsevier, vol. 40(C), pages 116-133.
  5. Olivier Damette & St├ęphane Goutte, 2014. "Tobin tax and trading volume tightening: a reassessment," Working Papers halshs-00926805, HAL.
  6. Michael R. King & Carol Osler & Dagfinn Rime, 2013. "The market microstructure approach to foreign exchange - Looking back and looking forward," Working Paper 2013/12, Norges Bank.
  7. de Zwart, G.J. & Markwat, T.D. & Swinkels, L.A.P. & van Dijk, D.J.C., 2007. "The Economic Value of Fundamental and Technical Information in Emerging Currency Markets," ERIM Report Series Research in Management ERS-2007-096-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  8. H. Dewachter & R. Houssa & M. Lyrio & P.R. Kaltwasser, 2011. "Dynamic Forecasting Rules and the Complexity of Exchange Rate Dynamics," Review of Business and Economic Literature, Intersentia, vol. 56(4), pages 454-472, December.
  9. ter Ellen, Saskia & Verschoor, Willem F.C. & Zwinkels, Remco C.J., 2013. "Dynamic expectation formation in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 75-97.
  10. Carl Chiarella & Xue-Zhong He & Remco C.J. Zwinkels, 2014. "Heterogeneous Expectations in Asset Pricing:Empirical Evidence from the S&P500," Research Paper Series 344, Quantitative Finance Research Centre, University of Technology, Sydney.
  11. Lof, Matthijs, 2012. "Heterogeneity in stock prices: A STAR model with multivariate transition function," Journal of Economic Dynamics and Control, Elsevier, vol. 36(12), pages 1845-1854.

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