Exchange Rates and Asset Prices: Heterogeneous Agents at Work

30 Pages Posted: 11 Jun 2013

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: May 31, 2013

Abstract

This paper merges two branches of the literature. On one hand we study a heterogeneous agents framework to model exchange rates and stock prices. On the other hand we model the relationship between these two series through a DSGE model. Investors choose one of two rules to form their expectations. One rule is based on an open economy model, which reacts to the information from the financial markets. The second rule follows a backward looking approach. We find that when DSGE agents misinterpret the information coming from the financial markets as exogenous productivity shocks they unknowingly amplify the volatility of these markets. The simulated series replicate the stylized facts of real data. We also estimate the DSGE and chartists expectations, and we find that our DSGE agents make output forecasts that are not qualitatively different than the DSGE forecasts from the recent Bayesian literature.

Keywords: heterogeneous agents, DSGE, exchange rates, stock prices

JEL Classification: A110, E200, F300, F310, F370

Suggested Citation

Piccillo, Giulia, Exchange Rates and Asset Prices: Heterogeneous Agents at Work (May 31, 2013). CESifo Working Paper Series No. 4257. Available at SSRN: https://ssrn.com/abstract=2277429

Giulia Piccillo (Contact Author)

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands

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
Netherlands

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