Bubbling and Crashing Exchange Rates
44 Pages Posted: 10 Nov 2003
Date Written: September 2003
We develop a simple model of the foreign exchange market in which agents optimize their portfolio and use different forecasting rules. They check the profitability of these rules ex post and select the more profitable one. This model produces two kinds of equilibria, a fundamental and a bubble one. In a stochastic environment the model generates a complex dynamics in which bubbles and crashes occur at unpredictable moments. We also analyse the empirical relevance of the model.
JEL Classification: F31, F41
Suggested Citation: Suggested Citation