Modeling optimism and pessimism in the foreign exchange market

Arbeitspapier

In this paper we model how the existence of different beliefs about the underlying fundamental value of a currency affects the dynamics of the exchange rate. We find that a divergence of beliefs creates the potential for waves of optimism and pessimism that alternate in an unpredictable way. These waves are disconnected from the underlying (objective) fundamental value. We also find that in such a world there is sensitivity to initial conditions, i.e. small changes in beliefs can fundamentally alter the time path of the exchange rate.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 1962

Classification and Topics

• Classification: Wirtschaft ; Computational Techniques; Simulation Modeling ; Asset Pricing; Trading Volume; Bond Interest Rates ; International Financial Markets
• Subject: Wechselkurstheorie ; Anlageverhalten ; Portfolio-Management ; Erwartungstheorie ; Wertpapieranalyse ; Simulation ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): de Grauwe, Paul ; Kaltwasser, Pablo Rovira
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2007

Further information

• Handle: http://hdl.handle.net/10419/26007
• Last update: 10.03.2025, 11:44 AM CET