Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/72645 
Year of Publication: 
2003
Series/Report no.: 
CFS Working Paper No. 2003/10
Publisher: 
Goethe University Frankfurt, Center for Financial Studies (CFS), Frankfurt a. M.
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.
Subjects: 
nonlinearities
technical and fundamental trading
STAR GARCH
JEL: 
F31
C51
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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