IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Deterministic Chaos in the Foreign Exchange Markets

  • De Grauwe, Paul
Registered author(s):

    Linear models in which exchange rates are driven by stochastic `news' are subject to a number of failings. In this paper we present a non-linear, deterministic model, incorporating concepts from chaos theory, which is capable of producing unpredictable exchange rate movements without `news'. Two non-linearities arise from a J-curve effect in the trade balance and the modelling of both `chartist' and `fundamental' influences in expectations formation. The model displays extreme sensitivity to only small changes in its initial conditions and its parameter values - one of the requirements for a model to generate chaotic behaviour. Only a few periods after such changes, the time path of the exchange rate appears to have been generated from a totally different model. This implies that forecasts based on exchange rate models are effectively impossible, because the tiniest errors generate totally different paths for the exchange rate. The results warn against excessive reliance on `news' to explain exchange rate movements.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.cepr.org/active/publications/discussion_papers/dp.php?dpno=370
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 370.

    as
    in new window

    Length:
    Date of creation: Jan 1990
    Date of revision:
    Handle: RePEc:cpr:ceprdp:370
    Contact details of provider: Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
    Phone: 44 - 20 - 7183 8801
    Fax: 44 - 20 - 7183 8820

    Order Information: Email:


    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:370. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.