Exchange Rate Expectations: Evidence from an Artificial Economy

Philip Marey (philip.marey@rabobank.com)

No 665, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: Survey studies on exchange rate expectations tend to reject the rational expectations hypothesis for longer horizons. Extrapolative, adaptive and regressive expectations have been tested as alternatives, usually rejecting static expectations. The purpose of this paper is to investigate the plausibility of these alternative exchange rate expectations mechanisms in an artificial economy with traders which are heterogeneous in initial endowments, risk aversion and use of information. Artificial markets which consist of either extrapolative or adaptive expectations traders fail to reproduce statistical properties that are characteristic for empirical quarterly exchange rate series, while artificial markets with regressive expectations traders often succeed. Adaptive expectations markets are rarely weak-form efficient. Extrapolative expectations markets may be weak-form efficient, but generate too many extreme returns to be empirically plausible. Regressive expectations markets often produce exchange rate series that are similar to empirical data. The (perceived) existence of an 'anchor' seems to play an important role in the functioning of foreign exchange markets, determining the frequency of extreme exchange rate returns.

Date: 2000-08-01
References: Add references at CitEc
Citations:

Downloads: (external link)
http://fmwww.bc.edu/RePEc/es2000/0665.pdf main text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ecm:wc2000:0665

Access Statistics for this paper

More papers in Econometric Society World Congress 2000 Contributed Papers from Econometric Society Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum (baum@bc.edu).