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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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    Cited by:

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    2. Federico Bassi & Raquel Ramos & Dany Lang, 2023. "Bet against the trend and cash in profits: An agent-based model of endogenous fluctuations of exchange rates," Journal of Evolutionary Economics, Springer, vol. 33(2), pages 429-472, April.
    3. 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.
    4. Roberto Dieci & Xue-Zhong He, 2018. "Heterogeneous Agent Models in Finance," Research Paper Series 389, Quantitative Finance Research Centre, University of Technology, Sydney.
    5. Goldbaum, David, 2021. "The origins of influence," Economic Modelling, Elsevier, vol. 97(C), pages 380-396.
    6. repec:ipg:wpaper:31 is not listed on IDEAS
    7. 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.
    8. David Goldbaum, 2016. "Networks formation to assist decision making," Working Paper Series 37, Economics Discipline Group, UTS Business School, University of Technology, Sydney.
    9. repec:ipg:wpaper:2013-031 is not listed on IDEAS

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