Advanced Search
MyIDEAS: Login to save this paper or follow this series

Modeling Optimism and Pessimism in the Foreign Exchange Market

Contents:

Author Info

  • Paul De Grauwe
  • Pablo Rovira Kaltwasser

Abstract

In this paper we model how the existence of different beliefs about the underlying fundamental value of a currency affects the dynamics of the exchange rate. We find that a divergence of beliefs creates the potential for waves of optimism and pessimism that alternate in an unpredictable way. These waves are disconnected from the underlying (objective) fundamental value. We also find that in such a world there is "sensitivity to initial conditions", i.e. small changes in beliefs can fundamentally alter the time path of the exchange rate.

Download Info

If 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.
File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2007/wp-cesifo-2007-04/cesifo1_wp1962.pdf
Download Restriction: no

Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1962.

as in new window
Length:
Date of creation: 2007
Date of revision:
Handle: RePEc:ces:ceswps:_1962

Contact details of provider:
Postal: Poschingerstrasse 5, 81679 Munich
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Email:
Web page: http://www.cesifo.de
More information through EDIRC

Related research

Keywords:

References

References listed on IDEAS
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.:
as in new window
  1. Evans, Martin D. & Lyons, Richard K., 1999. "Order Flow and Exchange Rate Dynamics," Research Program in Finance, Working Paper Series, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley qt0dh1c16w, Research Program in Finance, Institute for Business and Economic Research, UC Berkeley.
  2. Luisa Corrado & Marcus Miller & Lei Zhang, 2007. "Bulls, bears and excess volatility: can currency intervention help?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 12(2), pages 261-272.
  3. Ricardo Hausmann & Federico Sturzenegger, 2006. "Why the US Current Account Deficit is Sustainable," International Finance, Wiley Blackwell, Wiley Blackwell, vol. 9(2), pages 223-240, 08.
  4. Maurice Obstfeld & Kenneth Rogoff, 2005. "The unsustainable U.S. current account position revisited," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco.
  5. William A. Brock & Cars H. Hommes, 1995. "Rational Routes to Randomness," Working Papers, Santa Fe Institute 95-03-029, Santa Fe Institute.
  6. Lux, T. & M. Marchesi, . "Scaling and Criticality in a Stochastic Multi-Agent Model of a Financial Market," Discussion Paper Serie B, University of Bonn, Germany 438, University of Bonn, Germany, revised Jul 1998.
  7. Brock, W.A. & Hommes, C.H., 1996. "Hetergeneous Beliefs and Routes to Chaos in a Simple Asset Pricing Model," Working papers, Wisconsin Madison - Social Systems 9621, Wisconsin Madison - Social Systems.
  8. Gilles Teyssière & Alan Kirman, 2001. "Microeconomic Models for Long-Memory in the Volatility of Financial Time Series," CeNDEF Workshop Papers, January 2001, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance 5A.4, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  9. Taylor, Mark P. & Allen, Helen, 1992. "The use of technical analysis in the foreign exchange market," Journal of International Money and Finance, Elsevier, Elsevier, vol. 11(3), pages 304-314, June.
  10. Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 5(1), pages 193-206, Winter.
  11. Lux, Thomas & Schornstein, Sascha, 2003. "Genetic learning as an explanation of stylized facts of foreign exchange markets," Economics Working Papers, Christian-Albrechts-University of Kiel, Department of Economics |aEconomics working paper, Christian-Albrechts-University of Kiel, Department of Economics.
  12. Brock, W.A., 1995. "A Rational Route to Randomness," Working papers, Wisconsin Madison - Social Systems 9530, Wisconsin Madison - Social Systems.
  13. Lux, Thomas, 1998. "The socio-economic dynamics of speculative markets: interacting agents, chaos, and the fat tails of return distributions," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 33(2), pages 143-165, January.
  14. Hommes, Cars H., 2006. "Heterogeneous Agent Models in Economics and Finance," Handbook of Computational Economics, Elsevier, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 23, pages 1109-1186 Elsevier.
  15. Brunnermeier, Markus K., 2001. "Asset Pricing under Asymmetric Information: Bubbles, Crashes, Technical Analysis, and Herding," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198296980, October.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Jongen, Ron & Verschoor, Willem F C & Wolff, Christian C & Zwinkels, Remco C.J., 2008. "Dispersion of Beliefs in the Foreign Exchange Market," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6738, C.E.P.R. Discussion Papers.
  2. J. Atsu Amegashie & Bazoumana Ouattara & Eric Strobl, 2007. "Moral Hazard and the Composition of Transfers: Theory with an Application to Foreign Aid," Working Papers, University of Guelph, Department of Economics and Finance 0702, University of Guelph, Department of Economics and Finance.
  3. Luisa Corrado & Marcus Miller & Lei Zhang, 2007. "Bulls, bears and excess volatility: can currency intervention help?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 12(2), pages 261-272.
  4. Kaltwasser, Pablo Rovira, 2010. "Uncertainty about fundamentals and herding behavior in the FOREX market," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 389(6), pages 1215-1222.
  5. Ahmad Naimzada & Marina Pireddu, 2014. "Real and financial interacting oscillators: a behavioral macro-model with animal spirits," Working Papers, University of Milano-Bicocca, Department of Economics 268, University of Milano-Bicocca, Department of Economics, revised Feb 2014.
  6. Yuan, Chunming, 2011. "The exchange rate and macroeconomic determinants: Time-varying transitional dynamics," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 22(2), pages 197-220, August.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_1962. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.