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)
New Economics Papers: this item is included in nep-cba and nep-mon
Date: 2007-01
Note: Ec
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Journal Article: Bulls, bears and excess volatility: can currency intervention help? (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:cam:camdae:0708

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