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.

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Metadaten
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:Universit├Ątsbibliothek 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):License LogoDeutsches Urheberrecht