Fundamental and Non-Fundamental Equilibria in the Foreign Exchange Market. A Behavioural Finance Framework

Paul de Grauwe, Roberto Dieci, Marianna Grimaldi and Paul De Grauwe
Authors registered in the RePEc Author Service: Paul De Grauwe

No 1431, 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; basins of attraction (search for similar items in EconPapers)
Date: 2005
New Economics Papers: this item is included in nep-fin and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_1431

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