Exchange Rates and Asset Prices: Heterogeneous Agents at Work

18 Pages Posted: 16 Mar 2009

See all articles by Giulia Piccillo

Giulia Piccillo

Maastricht University; Liverpool University; Utrecht University - School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: January 2009


This paper studies the relationship between exchange rates and asset prices. It takes the novel approach of modeling both the markets in a framework of heterogeneous agents. Investors maximize their profits from the international equity markets by solving a Mean-Variance problem. As a result, agents choose between different combinations of rules in the home and foreign equity market as well as in the foreign exchange market. Given the incomplete information setting, agents check the past profitability of their rules and switch behavior in the effort to maximize their profits. Due to the heuristics embedded within the model, this simple frame-work alone is able to create a complex, time-varying dynamics. This dynamics is analyzed for different parameters and conditions. Finally the model is brought to the data, to check the fitness of the predictions on the real world markets.

Keywords: Behavioral finance, exchange rates, asset prices

Suggested Citation

Piccillo, Giulia, Exchange Rates and Asset Prices: Heterogeneous Agents at Work (January 2009). Available at SSRN: or

Giulia Piccillo (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD

Liverpool University ( email )

Eleanor Rathbone Building
Bedford Street North
Liverpool L69 7ZA
United Kingdom

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, +31 30 253 7373 3584 EC

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