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Do foreign exchange fund managers behave like heterogeneous agents?

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  • Willem F.C. Verschoor
  • Remco C.J. Zwinkels

Abstract

This paper estimates an Heterogeneous Agent Model (HAM) on currency trader indices to explain the large shifts in profitability in currency styles surrounding the global financial crisis. In the model, fund managers allocate capital conditional on recent performance to a value strategy, a momentum strategy, and a carry strategy. Subsequent estimation results reveal that (1) a large part of the behavior of currency managers can indeed be described by these three simple strategies, and (2) currency managers shift capital from recent winning styles to recent losing styles, and hence apply a negative feedback strategy. We finally show that a negative feedback strategy is indeed optimal, but currency managers could improve performance by applying it less aggressively if they were able to.

Suggested Citation

  • Willem F.C. Verschoor & Remco C.J. Zwinkels, 2013. "Do foreign exchange fund managers behave like heterogeneous agents?," Quantitative Finance, Taylor & Francis Journals, vol. 13(7), pages 1125-1134, February.
  • Handle: RePEc:taf:quantf:v:13:y:2013:i:7:p:1125-1134
    DOI: 10.1080/14697688.2013.777156
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    References listed on IDEAS

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    1. repec:eee:dyncon:v:85:y:2017:i:c:p:21-45 is not listed on IDEAS
    2. Michael Frenkel & Matthias Mauch & Jan-Christoph R├╝lke, 2017. "Forecaster Rationality and Expectation Formation in Foreign Exchange Markets: Do Emerging Markets Differ from Industrialized Economies?," WHU Working Paper Series - Economics Group 17-04, WHU - Otto Beisheim School of Management.
    3. Kukacka, Jiri & Barunik, Jozef, 2017. "Estimation of financial agent-based models with simulated maximum likelihood," Journal of Economic Dynamics and Control, Elsevier, vol. 85(C), pages 21-45.
    4. Saskia ter Ellen & Willem F.C. Verschoor, 2017. "Heterogeneous beliefs and asset price dynamics: a survey of recent evidence," Working Paper 2017/22, Norges Bank.

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