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Bubbles and crashes in a Behavioural Finance Model

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Author Info
Paul De Grauwe (University of Leuven)
Marianna Grimaldi (Sveriges Riksbank)
Abstract

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.

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Publisher Info
Paper provided by Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro in its series Working Papers de Economia (Economics Working Papers) with number 25.

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Length: 41 pages
Date of creation: Aug 2005
Date of revision:
Handle: RePEc:ave:wpaper:252005

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Related research
Keywords: exchange rate; bounded rationality; heterogeneous agents; bubbles and crashes; complex dynamics.;

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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This page was last updated on 2009-11-15.

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