Bubbles and Crashes in a Behavioural Finance Model

Paul De Grauwe and Marianna Grimaldi

No 1194, CESifo Working Paper Series from CESifo

Abstract: We develop a simple model of the exchange rate in which agents optimize their portfolio and use different forecasting rules. They check the profitability of these rules ex post and select the more profitable one. This model produces two kinds of equilibria, a fundamental and a bubble one. In a stochastic environment the model generates a complex dynamics in which bubbles and crashes occur at unpredictable moments. We contrast these "behavioural" bubbles with "rational" bubbles.

Keywords: exchange rate; bounded rationality; heterogeneous agents; bubbles and crashes; complex dynamics (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-fmk and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Bubbles and crashes in a Behavioural Finance Model (2005)
Working Paper: Bubbles and Crashes in a Behavioural Finance Model (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_1194

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