Heterogeneous expectations and exchange rate dynamics

Chiarella, C; He, XZ; Zheng, M

Heterogeneous expectations and exchange rate dynamics

Chiarella, C He, XZ

Zheng, M

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Publication Type:: Journal Article
Citation:: European Journal of Finance, 2013, 19 (5), pp. 392 - 419
Issue Date:: 2013-05-01

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Field	Value	Language
dc.contributor.author	Chiarella, C	en_US
dc.contributor.author	He, XZ https://orcid.org/0000-0003-1446-9996	en_US
dc.contributor.author	Zheng, M	en_US
dc.date.issued	2013-05-01	en_US
dc.identifier.citation	European Journal of Finance, 2013, 19 (5), pp. 392 - 419	en_US
dc.identifier.issn	1351-847X	en_US
dc.identifier.uri	http://hdl.handle.net/10453/23529
dc.description.abstract	This article presents a continuous-time model of exchange rates not only relying on macroeconomic factors but also having an investor heterogeneity component. The driving macroeconomic factor is the domestic-foreign interest rate differential, while the investor heterogeneity is described by the expectations of boundedly rational portfolio managers who use a weighted average of the expectations of fundamentalists and chartists. Within this framework, the different roles of the macroeconomic factor and investor heterogeneity in the determination of the exchange rate are examined explicitly. We show that this simple model generates very complicated market behaviour, including the existence of multiple steady-state equilibria, deviations of the market exchange rate from the fundamental one and market fluctuations. Numerical simulation of the corresponding stochastic version of the model shows that the model is able to generate typical time series and volatility clustering patterns observed in exchange rate markets. © 2013 Copyright Taylor and Francis Group, LLC.	en_US
dc.relation.ispartof	European Journal of Finance	en_US
dc.relation.isbasedon	10.1080/1351847X.2011.601690	en_US
dc.subject.classification	Finance	en_US
dc.title	Heterogeneous expectations and exchange rate dynamics	en_US
dc.type	Journal Article
utslib.citation.volume	5	en_US
utslib.citation.volume	19	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Finance Discipline
pubs.organisational-group	/University of Technology Sydney/Strength - QFRC - Quantitative Finance Research Centre
utslib.copyright.status	open_access
pubs.issue	5	en_US
pubs.publication-status	Published	en_US
pubs.volume	19	en_US

Abstract:

This article presents a continuous-time model of exchange rates not only relying on macroeconomic factors but also having an investor heterogeneity component. The driving macroeconomic factor is the domestic-foreign interest rate differential, while the investor heterogeneity is described by the expectations of boundedly rational portfolio managers who use a weighted average of the expectations of fundamentalists and chartists. Within this framework, the different roles of the macroeconomic factor and investor heterogeneity in the determination of the exchange rate are examined explicitly. We show that this simple model generates very complicated market behaviour, including the existence of multiple steady-state equilibria, deviations of the market exchange rate from the fundamental one and market fluctuations. Numerical simulation of the corresponding stochastic version of the model shows that the model is able to generate typical time series and volatility clustering patterns observed in exchange rate markets. © 2013 Copyright Taylor and Francis Group, LLC.

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10453/23529