Heterogeneous expectations in the foreign exchange market |
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Authors: | Ralf Ahrens Stefan Reitz |
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Institution: | (1) Quantitative Products, DEKA Investment GmbH, Mainzer Landstrasse 16, 60325 Frankfurt, Germany;(2) Department of Economics, University of Giessen, Licher Strasse 66, 35394 Giessen, Germany |
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Abstract: | In this study a regime-switching approach is applied to estimate the chartist and fundamentalist (c&f) exchange rate model originally proposed by Frankel and Froot (1986). The c&f model is tested against alternative regime-switching specifications applying likelihood ratio tests. Nested atheoretical models like the popular segmented trends model suggested by Engel and Hamilton (1990) are rejected in favour of the multi-agent model. Our findings turned out to be relatively robust when assessing the models sub-sample estimates and out-of-sample performance.JEL Classification:
F31, F37, G12, G15
Correspondence to: S. Reitz |
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Keywords: | Exchange rates Multi agent models Markov regime-switching |
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