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Nonlinearities and Cyclical Behavior: The Role of Chartists and Fundamentalists

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Author Info
Stefan Reitz () (University of Giessen)
Frank Westerhoff () (University of Osnabrueck)

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Abstract

We develop a behavioral exchange rate model with chartists and fundamentalists to study cyclical behavior in foreign exchange markets. Within our model, the market impact of fundamentalists depends on the strength of their belief in fundamental analysis. Estimation of a STAR GARCH model shows that the more the exchange rate deviates from its fundamental value, the more fundamentalists leave the market. In contrast to previous findings, our paper indicates that due to the nonlinear presence of fundamentalists, market stability decreases with increasing misalignments. A stabilization policy such as central bank interventions may help to deflate bubbles.

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Paper provided by Center for Financial Studies in its series CFS Working Paper Series with number 2003/10.

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Length: 19 pages
Date of creation: 10 Jan 2003
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Handle: RePEc:cfs:cfswop:wp200310

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Related research
Keywords: nonlinearities; technical and fundamental trading; STAR GARCH;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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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.:
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    Other versions:
  3. 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.
  4. Sarantis, Nicholas, 1999. "Modeling non-linearities in real effective exchange rates," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 27-45, January. [Downloadable!] (restricted)
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  6. Lutz Kilian & Mark P. Taylor, 2001. "Why is it so difficult to beat the random walk forecast of exchange rates," Working Paper Series 088, European Central Bank. [Downloadable!]
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  7. Nam, Kiseok & Pyun, Chong Soo & Avard, Stephen L., 2001. "Asymmetric reverting behavior of short-horizon stock returns: An evidence of stock market overreaction," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 807-824, April. [Downloadable!] (restricted)
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  15. Chortareas, Georgios E. & Kapetanios, George & Shin, Yongcheol, 2002. "Nonlinear mean reversion in real exchange rates," Economics Letters, Elsevier, vol. 77(3), pages 411-417, November. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, 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.)

  1. Peter Boswijk & Cars H. Hommes & Sebastiano Manzan, 2005. "Behavioral Heterogeneity in Stock Prices," Tinbergen Institute Discussion Papers 05-052/1, Tinbergen Institute. [Downloadable!]
    Other versions:
  2. Gunduz Caginalp & Vladimira Ilieva, 2006. "The dynamics of trader motivations in asset bubbles," Labsi Experimental Economics Laboratory University of Siena 008, University of Siena. [Downloadable!]
  3. Daniel Buncic, 2009. "Understanding forecast failure of ESTAR models of real exchange rates," EERI Research Paper Series EERI_RP_2009_18, Economics and Econometrics Research Institute (EERI). [Downloadable!]
  4. Lukas Menkhoff & Rafael R. Rebitzky & Michael Schröder, 2008. "Heterogeneity in Exchange Rate Expectations: Evidence on the Chartist-Fundamentalist Approach," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  5. Christian Bauer & Paul De Grauwe & Stefan Reitz, 2007. "Exchange Rates Dynamics in a Target Zone – A Heterogeneous Expectations Approach," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  6. Stefan Reitz & M.P Taylor, 2006. "The Coordination Channel of Foreign Exchange Intervention," Computing in Economics and Finance 2006 16, Society for Computational Economics. [Downloadable!]
  7. Reitz, Stefan & Taylor, Mark P., 2006. "The coordination channel of foreign exchange intervention: a nonlinear microstructural analysis," Discussion Paper Series 1: Economic Studies 2006,08, Deutsche Bundesbank, Research Centre. [Downloadable!]
    Other versions:
  8. Frank Westerhoff & Martin Hohnisch, 2007. "A note on interactions-driven business cycles," Journal of Economic Interaction and Coordination, Springer, vol. 2(1), pages 85-91, June. [Downloadable!] (restricted)
  9. Klein, Achim & Urbig, Diemo & Kirn, Stefan, 2008. "Who drives the Market? Estimating a heterogeneous Agent-based Financial Market Model using a Neural Network Approach," MPRA Paper 14433, University Library of Munich, Germany. [Downloadable!]
  10. Stefan Reitz & Frank Westerhoff, 2004. "Target Zone Interventions and Coordination of Expectations," Computing in Economics and Finance 2004 11, Society for Computational Economics. [Downloadable!]
  11. Buncic, Daniel, 2009. "Understanding forecast failure in ESTAR models of real exchange rates," MPRA Paper 13121, University Library of Munich, Germany. [Downloadable!]
  12. Buncic, Daniel, 2009. "Understanding forecast failure of ESTAR models of real exchange rates," MPRA Paper 16525, University Library of Munich, Germany. [Downloadable!]
  13. Simone Alfarano & Thomas Lux & Friedrich Wagner, 2005. "Estimation of Agent-Based Models: The Case of an Asymmetric Herding Model," Computational Economics, Springer, vol. 26(1), pages 19-49, August. [Downloadable!] (restricted)
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