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Uncertainty aversion in a heterogeneous agent model of foreign exchange rate formation

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  • Kozhan, Roman
  • Salmon, Mark

Abstract

This paper provides what we believe to be the first empirical test of whether investors in the foreign exchange market are uncertainty averse. We do this using a heterogeneous agents model in which fundamentalist and chartist beliefs of the exchange rate co-exist and are allowed to be either uncertainty neutral or uncertainty averse. Uncertainty aversion is modelled using the maxmin expected utility approach. We find significant evidence of uncertainty aversion in the FX market where in particular fundamentalists are found to be largely uncertainty neutral while chartists are mainly uncertainty averse. Inclusion of uncertainty averse agents significantly improves the empirical performance of the model.

Suggested Citation

  • Kozhan, Roman & Salmon, Mark, 2009. "Uncertainty aversion in a heterogeneous agent model of foreign exchange rate formation," Journal of Economic Dynamics and Control, Elsevier, vol. 33(5), pages 1106-1122, May.
  • Handle: RePEc:eee:dyncon:v:33:y:2009:i:5:p:1106-1122
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    Cited by:

    1. Gradojevic, Nikola & Gençay, Ramazan, 2013. "Fuzzy logic, trading uncertainty and technical trading," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 578-586.
    2. He, Kaijian & Wang, Lijun & Zou, Yingchao & Lai, Kin Keung, 2014. "Value at risk estimation with entropy-based wavelet analysis in exchange markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 408(C), pages 62-71.
    3. repec:kap:theord:v:83:y:2017:i:3:d:10.1007_s11238-017-9595-y is not listed on IDEAS
    4. Marco Rojas & Damián Vergara, 2018. "Ambiguity and Long-Run Cooperation in Strategic Games," Working Papers wp415, University of Chile, Department of Economics.
    5. repec:hal:journl:halshs-00429573 is not listed on IDEAS
    6. Joëts, Marc, 2015. "Heterogeneous beliefs, regret, and uncertainty: The role of speculation in energy price dynamics," European Journal of Operational Research, Elsevier, vol. 247(1), pages 204-215.

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