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Uncertainty aversion in a heterogeneous agent model of foreign exchange rate formation

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Kozhan, Roman and Salmon, Mark H.. (2008) Uncertainty aversion in a heterogeneous agent model of foreign exchange rate formation. Journal of Economic Dynamics and Control, Vol.33 (No.5). pp. 1106-1122. ISSN 0165-1889

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Official URL: http://dx.doi.org/10.1016/j.jedc.2008.11.008

Abstract

This paper provides what we believe to be the first empirical test of whether investors in the foreign exchange market are uncertainty averse. We do this using a heterogeneous agents model in which fundamentalist and chartist beliefs of the exchange rate co-exist and are allowed to be either uncertainty neutral or uncertainty averse. Uncertainty aversion is modelled using the maxmin expected utility approach. We find significant evidence of uncertainty aversion in the FX market where in particular fundamentalists are found to be largely uncertainty neutral while chartists are mainly uncertainty averse. Inclusion of uncertainty averse agents significantly improves the performance of the model.

Item Type:

Journal Article

Subjects:

H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory

Divisions:

Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre
Faculty of Social Sciences > Warwick Business School > Finance Group
Faculty of Social Sciences > Warwick Business School

Library of Congress Subject Headings (LCSH):

Foreign exchange rates -- Mathematical models, Uncertainty, Risk perception, Statistical hypothesis testing, Simulation methods

Series Name:

Working papers (Warwick Business School. Financial Econometrics Research Centre)

Journal or Publication Title:

Journal of Economic Dynamics and Control

Publisher:

Elsevier BV

Place of Publication:

Coventry

ISSN:

0165-1889

Official Date:

2008

Dates:

Date	Event
2008	Published

Volume:

Vol.33

Number:

No.5

Number of Pages:

Page Range:

pp. 1106-1122

Identification Number:

10.1016/j.jedc.2008.11.008

Status:

Peer Reviewed

Publication Status:

Published

Access rights to Published version:

Open Access

References:

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