Bubbles and Crashes in a Behavioural Finance Model
AbstractWe 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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Bibliographic InfoPaper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 164.
Length: 44 pages
Date of creation: 01 May 2004
Date of revision:
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)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-06-07 (All new papers)
- NEP-CBE-2004-06-07 (Cognitive & Behavioural Economics)
- NEP-FIN-2004-06-07 (Finance)
- NEP-FMK-2004-06-07 (Financial Markets)
- NEP-IFN-2004-06-07 (International Finance)
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