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A heterogeneous agent exchange rate model with speculators and non-speculators

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  • Elias, Christopher J.

Abstract

This paper constructs a heterogeneous agent exchange rate model of speculators and non-speculators from a simple monetary framework. The model replaces rational expectations with an adaptive learning rule that forecasts future exchange rates with an econometric model, and assumes two types of market participants, speculators and non-speculators, that differ by their forecasting model. Speculators employ a correctly specified forecasting model, are relatively short-term oriented, and are subject to momentum and herding effects via an expectation shock; non-speculators utilize a simple forecasting model, have no incentive to be short-term oriented, and are not subject to herding effects. Parameters are calibrated and estimated using the method of simulated moments, and simulation results show that the model is able to replicate foreign exchange market stylized facts better than a model of representative agent rational expectations. Furthermore, the dynamics of the model are shown to derive from both agent heterogeneity and the expectation shock.

Suggested Citation

  • Elias, Christopher J., 2016. "A heterogeneous agent exchange rate model with speculators and non-speculators," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 203-223.
  • Handle: RePEc:eee:jmacro:v:49:y:2016:i:c:p:203-223
    DOI: 10.1016/j.jmacro.2016.07.006
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    More about this item

    Keywords

    Exchange rate; Adaptive learning; Expectations formation; Heterogeneous expectations; Misspecifications; Expectation shocks;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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