Heterogeneous Agents and Non-Normal Fundamentals

18 Pages Posted: 22 Mar 2006

See all articles by Marianna Grimaldi

Marianna Grimaldi

Monetary Policy Division Sveriges Riksbank

Remco C. J. Zwinkels

VU University Amsterdam - Department of Finance and Financial Sector Management

Date Written: September 2005

Abstract

This paper proposes an explanation for the disconnect puzzle between exchange rates and macro-economic variables in variance and extremes. We insert a fundamental rate with financial market characteristics into a heterogeneous agents model and simulate exchange rates in order to examine whether the model replicates the disconnect puzzle in higher moments. The simulations are consistent with reality if the exchange rate is detached from the fundamental rate, i.e. if there is a bubble. This implies that the disconnect puzzle can be explained by the fact that the market is in a constant bubble state, caused by a high proportion of technical analysts active in the market.

Keywords: Exchange rate, Heterogeneous agents, Transmission of news, Dynamics

JEL Classification: E44, F31

Suggested Citation

Grimaldi, Marianna and Zwinkels, Remco C.J., Heterogeneous Agents and Non-Normal Fundamentals (September 2005). Available at SSRN: https://ssrn.com/abstract=890503 or http://dx.doi.org/10.2139/ssrn.890503

Marianna Grimaldi

Monetary Policy Division Sveriges Riksbank ( email )

S-103 37 Stockholm
Sweden

Remco C.J. Zwinkels (Contact Author)

VU University Amsterdam - Department of Finance and Financial Sector Management ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

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