Nonlinearities and cyclical behavior: the role of chartists and fundamentalists
- We develop a behavioral exchange rate model with chartists and fundamentalists to study cyclical behavior in foreign exchange markets. Within our model, the market impact of fundamentalists depends on the strength of their belief in fundamental analysis. Estimation of a STAR GARCH model shows that the more the exchange rate deviates from its fundamental value, the more fundamentalists leave the market. In contrast to previous findings, our paper indicates that due to the nonlinear presence of fundamentalists, market stability decreases with increasing misalignments. A stabilization policy such as central bank interventions may help to deflate bubbles.
| Author: | Stefan Reitz, Frank Westerhoff |
|---|---|
| URN: | urn:nbn:de:hebis:30-10164 |
| Parent Title (German): | Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2003,10 |
| Series (Serial Number): | CFS working paper series (2003, 10) |
| Document Type: | Working Paper |
| Language: | English |
| Year of Completion: | 2003 |
| Year of first Publication: | 2003 |
| Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
| Release Date: | 2005/06/13 |
| Tag: | STAR GARCH; nonlinearities; technical and fundamental trading |
| GND Keyword: | GARCH-Prozess; Devisenmarkt; Wechselkurs |
| HeBIS-PPN: | 205394035 |
| Institutes: | Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) |
| Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
| JEL-Classification: | C Mathematical and Quantitative Methods / C5 Econometric Modeling / C51 Model Construction and Estimation |
| Licence (German): |  Deutsches Urheberrecht |
