Modeling Exchange Rate Behavior with a Genetic Algorithm
AbstractMotivated by empirical evidence, we construct a model whereheterogeneous, boundedly-rational market participants rely on a mix of technical and fundamental trading rules. The rules are applied according to a weighting scheme. Traders evaluate and update their mix of rules by genetic algorithm learning. Even for fundamental shocks with a low probability, the interaction between the traders produces a complex behavior of exchange rates. Our model simultaneously produces several stylized facts like high volatility, unit roots in the exchange rates, a fuzzy relationship between news and exchange-rate movements, cointegration between the exchange rate and its fundamental value, fat tails for returns, a declining kurtosis under time aggregation, weak evidence of mean reversion, and strong evidence of clustering in both volatility and trading volume. Copyright Kluwer Academic Publishers 2003
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Society for Computational Economics in its journal Computational Economics.
Volume (Year): 21 (2003)
Issue (Month): 3 (June)
exchange rate theory; technical and fundamental trading rules; genetic algorithm;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- LeBaron, Blake, 2000. "Agent-based computational finance: Suggested readings and early research," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 679-702, June.
- Kirman, Alan, 1993. "Ants, Rationality, and Recruitment," The Quarterly Journal of Economics, MIT Press, vol. 108(1), pages 137-56, February.
- Lux, T. & M. Marchesi, . "Volatility Clustering in Financial Markets: A Micro-Simulation of Interacting Agents," Discussion Paper Serie B 437, University of Bonn, Germany, revised Jul 1998.
- repec:att:wimass:9530 is not listed on IDEAS
- William A. Brock & Cars H. Hommes, 1997.
"A Rational Route to Randomness,"
Econometric Society, vol. 65(5), pages 1059-1096, September.
- Frankel, Jeffrey A & Froot, Kenneth A, 1986. "Understanding the U.S. Dollar in the Eighties: The Expectations of Chartists and Fundamentalists," The Economic Record, The Economic Society of Australia, vol. 0(0), pages 24-38, Supplemen.
- Lux, T. & M. Marchesi, . "Scaling and Criticality in a Stochastic Multi-Agent Model of a Financial Market," Discussion Paper Serie B 438, University of Bonn, Germany, revised Jul 1998.
- David M. Cutler & James M. Poterba & Lawrence H. Summers, 1991.
"Speculative Dynamics and the Role of Feedback Traders,"
NBER Working Papers
3243, National Bureau of Economic Research, Inc.
- Cutler, David M & Poterba, James M & Summers, Lawrence H, 1990. "Speculative Dynamics and the Role of Feedback Traders," American Economic Review, American Economic Association, vol. 80(2), pages 63-68, May.
- Culter, D.M. & Poterba, J.M. & Summers, L.H., 1990. "Speculative Dynamics And The Role Of Feedback Traders," Working papers 545, Massachusetts Institute of Technology (MIT), Department of Economics.
- Benoit Mandelbrot, 1963. "The Variation of Certain Speculative Prices," The Journal of Business, University of Chicago Press, vol. 36, pages 394.
- Christopher J. Neely, 1997. "Technical analysis in the foreign exchange market: a layman's guide," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 23-38.
- Goodhart, Charles A. E. & McMahon, Patrick C. & Ngama, Yerima L., 1993. "Testing for unit roots with very high frequency spot exchange rate data," Journal of Macroeconomics, Elsevier, vol. 15(3), pages 423-438.
- Richard B. Olsen & Ulrich A. Müller & Michel M. Dacorogna & Olivier V. Pictet & Rakhal R. Davé & Dominique M. Guillaume, 1997. "From the bird's eye to the microscope: A survey of new stylized facts of the intra-daily foreign exchange markets (*)," Finance and Stochastics, Springer, vol. 1(2), pages 95-129.
- Heiner, Ronald A, 1983. "The Origin of Predictable Behavior," American Economic Review, American Economic Association, vol. 73(4), pages 560-95, September.
- Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
- J. Doyne Farmer, 1999. "Physicists Attempt to Scale the Ivory Towers of Finance," Working Papers 99-10-073, Santa Fe Institute.
- Goodhart, Charles, 1988. "The Foreign Exchange Market: A Random Walk with a Dragging Anchor," Economica, London School of Economics and Political Science, vol. 55(220), pages 437-60, November.
- Taylor, Mark P. & Allen, Helen, 1992. "The use of technical analysis in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 11(3), pages 304-314, June.
- Floortje Alkemade & Han Poutré & Hans Amman, 2006. "Robust Evolutionary Algorithm Design for Socio-economic Simulation," Computational Economics, Society for Computational Economics, vol. 28(4), pages 355-370, November.
- Navarro-Barrientos, Jesús Emeterio & Cantero-Álvarez, Rubén & Matias Rodrigues, João F. & Schweitzer, Frank, 2008.
"Investments in random environments,"
Physica A: Statistical Mechanics and its Applications,
Elsevier, vol. 387(8), pages 2035-2046.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Guenther Eichhorn) or (Christopher F. Baum).
If references are entirely missing, you can add them using this form.