Electronic Resource
Cambridge, Mass.
:
Berkeley Electronic Press (now: De Gruyter)
Studies in nonlinear dynamics and econometrics
7.2003, 4, art3
ISSN:
1081-1826
Source:
Berkeley Electronic Press Academic Journals
Topics:
Mathematics
,
Economics
Notes:
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.
Type of Medium:
Electronic Resource
URL:
http://www.bepress.com/snde/vol7/iss4/art3
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