Expectations Driven Distortions in the Foreign Exchange Market
AbstractThis paper explores the phenomenon of lasting deviations of the exchange rate from its fundamental value in the foreign exchange market. Motivated by empirical observations a chartists-fundamentalists model is developed in which boundedly rational agents repeatedly choose between technical and fundamental trading rules to determine their speculative investment positions. Crucial for the dynamics is how the traders perceive the fundamental exchange rate. This perception process is based on psychological evidence. Simulations give rise to bubbles but simultaneously display quite realistic exchange rate dynamics (unit roots in the exchange rates, fat tails for returns, and volatility clustering).
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2001 with number 48.
Date of creation: 01 Apr 2001
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exchange rate theory; technical and fundamental trading rules; expectations and learning; market efficiency;
Other versions of this item:
- Westerhoff, Frank H., 2003. "Expectations driven distortions in the foreign exchange market," Journal of Economic Behavior & Organization, Elsevier, vol. 51(3), pages 389-412, July.
- Frank Westerhoff, 2001. "Expectations Driven Distortions in the Foreign Exchange Market," CeNDEF Workshop Papers, January 2001 1A.3, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
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