Uncertainty about fundamentals and herding behavior in the FOREX market

Pablo Rovira Kaltwasser

Physica A: Statistical Mechanics and its Applications, 2010, vol. 389, issue 6, 1215-1222

Abstract: It is traditionally assumed in finance models that the fundamental value of assets is known with certainty. Although this is an appealing simplifying assumption it is by no means based on empirical evidence. A simple heterogeneous agent model of the exchange rate is presented. In the model, traders do not observe the true underlying fundamental exchange rate and as a consequence they base their trades on beliefs about this variable. Despite the fact that only fundamentalist traders operate in the market, the model belongs to the heterogeneous agent literature, as traders have different beliefs about the fundamental rate.

Keywords: Herding behavior; Belief bias and uncertainty; Fundamental exchange rate; Econophysics (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:389:y:2010:i:6:p:1215-1222

DOI: 10.1016/j.physa.2009.11.012

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