Please use this identifier to cite or link to this item: https://repositorio.insper.edu.br/handle/11224/5872
Type: Working Paper
Title: Dynamic Forecasting Rules and the Complexity of Exchange Rate Dynamics
Author: Dewachter, Hans
Houssa, Romain
Lyrio, Marco Túlio Pereira
Kaltwasser, Pablo Rovira
Publication Date: 2011
Abstract: This paper investigates the exchange rate dynamics implied by a heterogeneous agent model proposed in De Grauwe and Grimaldi (2006). The two groups of agents, chartists and fundamentalists, use simple forecasting rules and the ex post relative profitability to decide whether to switch to the other group. We extend this model by introducing a simple evolutionary selection mechanism which allows agents not only to switch between groups but also to adapt the forecasting rule of each group over time. This selection process naturally leads agents to choose forecasting rules over time which results in the convergence of the exchange rate to its fundamental value. However, our learning rule is not robust to the introduction of shocks to the fundamental. In particular, once we allow for random variation in the fundamental, the model exhibits again all of the nonlinear features discussed in De Grauwe and Grimaldi (2006): the disconnect puzzle, volatility clustering and fat tails.
Keywords (english terms): Behavioral finance
exchange rate
Language: Inglês
CNPq Area: Ciências Sociais Aplicadas
Copyright: O INSPER E ESTE REPOSITÓRIO NÃO DETÊM OS DIREITOS DE USO E REPRODUÇÃO DOS CONTEÚDOS AQUI REGISTRADOS. É RESPONSABILIDADE DO USUÁRIO VERIFICAR OS USOS PERMITIDOS NA FONTE ORIGINAL, RESPEITANDO-SE OS DIREITOS DE AUTOR OU EDITOR
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