Speculative behavior, exchange rate volatility, and central bank intervention

Speculative behavior, exchange rate volatility, and central bank intervention

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Article ID: iaor2009420
Country: Germany
Volume: 9
Issue: 1/2
Start Page Number: 31
End Page Number: 50
Publication Date: Jul 2001
Journal: Central European Journal of Operations Research
Authors:
Keywords: exchange rates
Abstract:

The aim of this paper is twofold. First, to develop a model which helps to explain the high exchange rate volatility observed empirically. Second, to study under which conditions central bank interventions may calm down the foreign exchange market. Based on empirical observations, a model is presented where the agents select in each trading period a trading rule to determine their speculative positions. The agents have the choice between technical and fundamental trading rules. Simulations produce a high variability of the exchange rates, fat tails for returns, and weak evidence of mean reversion.

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