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Heterogeneous expectations in the foreign exchange market

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  • Ralf Ahrens
  • Stefan Reitz

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Abstract

In this study a regime-switching approach is applied to estimate the chartist and fundamentalist (c&f) exchange rate model originally proposed by Frankel and Froot (1986). The c&f model is tested against alternative regime-switching specifications applying likelihood ratio tests. Nested atheoretical models like the popular segmented trends model suggested by Engel and Hamilton (1990) are rejected in favour of the multi-agent model. Our findings turned out to be relatively robust when assessing the models’ sub-sample estimates and out-of-sample performance. Copyright Springer-Verlag Berlin/Heidelberg 2004

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Bibliographic Info

Article provided by Springer in its journal Journal of Evolutionary Economics.

Volume (Year): 15 (2004)
Issue (Month): 1 (January)
Pages: 65-82

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Handle: RePEc:spr:joevec:v:15:y:2004:i:1:p:65-82

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Related research

Keywords: Exchange rates; Multi agent models; Markov regime-switching;

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Cited by:
  1. Christian Bauer & Paul De Grauwe & Stefan Reitz, 2007. "Exchange Rates Dynamics in a Target Zone – A Heterogeneous Expectations Approach," CESifo Working Paper Series 2080, CESifo Group Munich.
  2. Roberta Colavecchio & Michael Funke, 2007. "Volatility dependence across Asia-Pacific on-shore and off-shore U.S. dollar futures markets," Quantitative Macroeconomics Working Papers 20708, Hamburg University, Department of Economics.
  3. LeBaron, Blake, 2006. "Agent-based Computational Finance," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 24, pages 1187-1233 Elsevier.
  4. Robin Pope & Reinhard Selten & Johannes Kaiser & Sebastian Kube & Jürgen Hagen, 2012. "Exchange rate determination: a theory of the decisive role of central bank cooperation and conflict," International Economics and Economic Policy, Springer, vol. 9(1), pages 13-51, March.
  5. Kühl, Michael, 2009. "Excess comovements between the Euro/US dollar and British pound/US dollar exchange rates," Center for European, Governance and Economic Development Research Discussion Papers 89, University of Goettingen, Department of Economics.

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