Nonlinearities and Cyclical Behavior: The Role of Chartists and Fundamentalists

Stefan Reitz and Frank Westerhoff

No 2003/10, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: We develop a behavioral exchange rate model with chartists and fundamentalists to study cyclical behavior in foreign exchange markets. Within our model, the market impact of fundamentalists depends on the strength of their belief in fundamental analysis. Estimation of a STAR GARCH model shows that the more the exchange rate deviates from its fundamental value, the more fundamentalists leave the market. In contrast to previous findings, our paper indicates that due to the nonlinear presence of fundamentalists, market stability decreases with increasing misalignments. A stabilization policy such as central bank interventions may help to deflate bubbles.

Keywords: nonlinearities; technical and fundamental trading; STAR GARCH (search for similar items in EconPapers)
JEL-codes: C51 F31 (search for similar items in EconPapers)
Date: 2003
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (75)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/72645/1/03_10.pdf (application/pdf)

Related works:
Journal Article: Nonlinearities and Cyclical Behavior: The Role of Chartists and Fundamentalists (2003)
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:zbw:cfswop:200310

Access Statistics for this paper

More papers in CFS Working Paper Series from Center for Financial Studies (CFS) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().