The Exchange Rate in a Behavioral Finance Framework

By P. Grauwe, M. Grimaldi. 2006

151 citations recorded by the source corpus.

This book provides an alternative view of the workings of foreign exchange markets. The authors' modeling approach is based on the idea that agents use simple forecasting rules and switch to those rules that have been shown to be the most profitable in the past. This selection mechanism is based on trial and error and is probably the best possible strategy in an uncertain world, the authors contend. It creates a rich dynamic in the foreign exchange markets and can generate bubbles and crashes. Sensitivity to initial conditions is a pervasive force in De Grauwe and Grimaldi's model. It explains why large exchange-rate changes and volatility clustering occur. It also has important implications for understanding how the news affects the exchange rate. De Grauwe and Grimaldi conclude that news in fundamentals has an unpredictable effect on the exchange rate. Sometimes, they maintain, it alters the exchange rate considerably; at other times it has no effectwhatsoever. The authors also use their model to analyze the effects of official interventions in the foreign exchange market. They show that simple intervention rules of the "leaning-against-the-wind" variety can be effective in eliminating bubbles and crashes in the exchange rate. They further demonstrate how, quite paradoxically, by intervening in the foreign exchange market the central bank makes the market look more efficient. Clear and comprehensive, The Exchange Rate in a Behavioral Finance Framework is a must-have for analysts in foreign exchange markets as well as students of international finance and economics.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/76835b3ba494d48c8cf6fd6ce4e5a841a22e602b

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Citations in the corpus

Stochastic behavioral asset pricing models and the stylized facts (2008, background): “…and have studied the endogenous development of wealth of agent groups as an alternative to switches due to the success or failure of their pre- 28 dictions (Gaunersdorfer, 2000; Chiarella, Dieci and Gardini, 2002, Chiarella and He, 2002, Brock, Hommes andWagener, 2005, DeGrauwe and Grimaldi, 2006).”
The scientific foundation of dynamic stochastic general equilibrium (DSGE) models (2010, background): “For recent surveys, see Kahneman and Thaler (2006) and Della Vigna (2007). This literature has followed two tracks.”
What Have we Learnt about Monetary Integration since the Maastricht Treaty (2006, background): “There is now substantial empirical evidence that the exchange rate is disconnected most of the time from its fundamental value and that its volatility cannot be explained by underlying fundamental volatility (see De Grauwe and Grimaldi, 2006, for evidence and implications of these findings).”
Exchange Rate Economics (2009, result): “Comparison of the estimates yielded by the Macroeconomic Balance Approach and the Equilibrium Exchange Rate Approach would then be possible, which is not true at the moment.”
The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis (2007, methodology): “Fifth, studies have explored the relation between non-linear exchange rate modelling and technical analysis (Clyde and Osler, 1997; Fiess and MacDonald, 1999; Kilian and Taylor, 2003; De Grauwe and Grimaldi, 2006, 2006a; Reitz and Taylor, 2006).”
Animal spirits and monetary policy (2008, unknown): “These attempts have been based mainly on the statistical learning approach pioneered by Sargent(1993) and Evans and Honkapohja(2001). This literature leads to important new insights (see e.g. Gaspar and Smets(2006), Orphanides and Williams(2004), Milani(2007a)). However, we feel that this approach s”