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Bubbling and Crashing Exchange Rates

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  • Marianna Grimaldi
  • Paul De Grauwe
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    Abstract

    We develop a simple model of the foreign exchange market 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 also analyse the empirical relevance of the model.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2003/wp-cesifo-2003-09/cesifo1_wp1045.pdf
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    Bibliographic Info

    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1045.

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    Date of creation: 2003
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    Handle: RePEc:ces:ceswps:_1045

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    Cited by:
    1. Amilon, Henrik, 2008. "Estimation of an adaptive stock market model with heterogeneous agents," Journal of Empirical Finance, Elsevier, vol. 15(2), pages 342-362, March.

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