Arbeitspapier

Genetic learning as an explanation of stylized facts of foreign exchange markets

This paper revisits the Kareken-Wallace model of exchange rate formation in a two-country overlapping generations world. Following the seminal paper by Arifovic (Journal of Political Economy, 104, 1996, 510 – 541) we investigate a dynamic version of the model in which agents? decision rules are updated using genetic algorithms. Our main interest is in whether the equilibrium dynamics resulting from this learning process helps to explain the main stylized facts of free-floating exchange rates (unit roots in levels together with fat tails in returns and volatility clustering). Our time series analysis of simulated data indicates that for particular parameterizations, the characteristics of the exchange rate dynamics are, in fact, very similar to those of empirical data. The similarity appears to be quite insensitive with respect to some of the ingredients of the GA algorithm (i.e. utility-based versus rank-based or tournament selection, binary or real coding). However, appearance or not of realistic time series characteristics depends crucially on the mutation probability (which should be low) and the number of agents (not more than about 1000). With a larger population, this collective learning dynamics looses its realistic appearance and instead exhibits regular periodic oscillations of the agents? choice variables.

Language
Englisch

Bibliographic citation
Series: Economics Working Paper ; No. 2003-12

Classification
Wirtschaft
Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
Foreign Exchange
Expectations; Speculations
Subject
learning
genetic algorithms
exchange rate dynamics
Wechselkurs
Volatilität
Monetäre Wechselkurstheorie
Overlapping Generations
Zwei-Länder-Modell
Lernprozess
Heuristisches Verfahren
Zeitreihenanalyse
Theorie

Event
Geistige Schöpfung
(who)
Lux, Thomas
Schornstein, Sascha
Event
Veröffentlichung
(who)
Kiel University, Department of Economics
(where)
Kiel
(when)
2003

Handle
URN
urn:nbn:de:101:1-200911021965
Last update
10.03.2025, 11:43 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Lux, Thomas
  • Schornstein, Sascha
  • Kiel University, Department of Economics

Time of origin

  • 2003

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