Bulls, Bears and Excess Volatility: can currency intervention help?

Luisa Corrado, Marcus Miller and Lei Zhang ()

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Asset mis-pricing may reflect investor psychology, with excess volatility arising from switches of sentiment. For a floating exchange rate where fundamentals follow a random walk, we show that excess volatility can be generated by the repeated entry and exit of currency `bulls' and `bears' with switches driven by `draw-down' trading rules. We argue that non-sterilised intervention - in support of `monitoring band' - can reduce excess volatility by coordinating beliefs in line with policy. Strategic complementarity in the foreign exchange market suggests that sterilised intervention may also play a coordinating role.

Keywords: Monitoring Rules; Monitoring Band; Bear and Bull Traders; Excess Volatility; Central Bank Intervention. (search for similar items in EconPapers)
JEL-codes: D52 F31 G12 (search for similar items in EconPapers)
Pages: 29
Date: 2007-01
New Economics Papers: this item is included in nep-cba and nep-mon
Note: Ec
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
https://files.econ.cam.ac.uk/repec/cam/pdf/cwpe0708.pdf (application/pdf)

Related works:
Journal Article: Bulls, bears and excess volatility: can currency intervention help? (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0708

Access Statistics for this paper

More papers in Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
Bibliographic data for series maintained by Jake Dyer ().