Journal article

Publication year: 2003

Journal: Studies in Nonlinear Dynamics & Econometrics

Volume number: 7

Issue number: 4

ISSN: 1081-1826

eISSN: 1558-3708

Open access status: Green

Publisher: De Gruyter

Abstract: 
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.

Harvard Citation style: Westerhoff, F. and Reitz, S. (2003) Nonlinearities and cyclical behavior: The role of chartists and fundamentalists, Studies in Nonlinear Dynamics & Econometrics, 7(4), Article 3

APA Citation style: Westerhoff, F., & Reitz, S. (2003). Nonlinearities and cyclical behavior: The role of chartists and fundamentalists. Studies in Nonlinear Dynamics & Econometrics. 7(4), Article 3.