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Bubbles In Foreign Exchange Markets

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  • KIRMAN, ALAN
  • RICCIOTTI, ROMAIN FABIO
  • TOPOL, RICHARD LÉON

Abstract

We consider a model in which foreign and domestic traders buy the assets of both of two countries. Speculators in both countries use chartist or fundamentalist rules for forecasting the exchange rate. Demand for the assets of each country is determined by these forecasts. Perceptions of the fundamentals in each country are not necessarily the same. Rules are used with a certain probability depending on an agent's previous experience with them. The demands of the fundamentalist and chartist agents in the two countries determine the temporary equilibrium exchange rate at each point in time. This is unique under certain assumptions. With traders of both nationalities there is no need, as in other models, for an exogenous supply of foreign exchange. The model produces realistic features of the equilibrium exchange rate series. Periods in which the exchange rate tracks the fundamentals of one of the countries alternate with others in which bubbles appear.

Suggested Citation

  • Kirman, Alan & Ricciotti, Romain Fabio & Topol, Richard Léon, 2007. "Bubbles In Foreign Exchange Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 11(S1), pages 102-123, November.
    • Handle: RePEc:cup:macdyn:v:11:y:2007:i:s1:p:102-123_06
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    References listed on IDEAS

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    1. LeBaron, Blake, 1999. "Technical trading rule profitability and foreign exchange intervention," Journal of International Economics, Elsevier, vol. 49(1), pages 125-143, October.
    2. Jeffrey A. Frankel & Kenneth Froot, 1990. "Exchange Rate Forecasting Techniques, Survey Data, and Implications for the Foreign Exchange Market," NBER Working Papers 3470, National Bureau of Economic Research, Inc.
    3. Alan Kirman, 1993. "Ants, Rationality, and Recruitment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 108(1), pages 137-156.
    4. Goeree, Jacob K. & Hommes, Cars H., 2000. "Heterogeneous beliefs and the non-linear cobweb model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 761-798, June.
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    Cited by:

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    2. Joëts, Marc, 2015. "Heterogeneous beliefs, regret, and uncertainty: The role of speculation in energy price dynamics," European Journal of Operational Research, Elsevier, vol. 247(1), pages 204-215.
    3. Goldbaum, David, 2021. "The origins of influence," Economic Modelling, Elsevier, vol. 97(C), pages 380-396.
    4. David Goldbaum, 2016. "Networks formation to assist decision making," Working Paper Series 37, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    5. Raquel Almeida Ramos & Federico Bassi & Dany Lang, 2020. "Bet against the trend and cash in profits," CEPN Working Papers halshs-02956879, HAL.
    6. Roberto Dieci & Xue-Zhong He, 2018. "Heterogeneous Agent Models in Finance," Research Paper Series 389, Quantitative Finance Research Centre, University of Technology, Sydney.
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    8. Kozhan, Roman & Salmon, Mark, 2009. "Uncertainty aversion in a heterogeneous agent model of foreign exchange rate formation," Journal of Economic Dynamics and Control, Elsevier, vol. 33(5), pages 1106-1122, May.
    9. repec:ipg:wpaper:2013-031 is not listed on IDEAS

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