Explaining the stylized facts of foreign exchange markets with a simple agent-based version of Paul de Grauwe's chaotic exchange rate model

Sarah Mignot and Frank H. Westerhoff

No 189, BERG Working Paper Series from Bamberg University, Bamberg Economic Research Group

Abstract: We propose a simple agent-based version of Paul de Grauwe's chaotic exchange rate model. In particular, we assume that each speculator follows his own technical and fundamental trading rule. Moreover, a speculator's choice between these two trading philosophies depends on his individual assessment of current market circumstances. Our agent-based model setup is able to explain a number of important stylized facts of foreign exchange markets, including bubbles and crashes, excess volatility, fat-tailed return distributions, serially uncorrelated returns and volatility clustering. A stability and bifurcation analysis of its deterministic skeleton provides us with useful insights that foster our understanding of exchange rate dynamics.

Keywords: Foreign exchange markets; exchange rates; chartists and fundamentalists; agent-based computational economics; stability and bifurcation analysis (search for similar items in EconPapers)
JEL-codes: D84 F31 G14 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-cmp, nep-hme, nep-ifn and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bamber:279554

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