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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. doi:10.1016/j.jedc.2008.11.008
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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 | ||||
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| Subjects: | H Social Sciences > HG Finance H Social Sciences > HB Economic Theory |
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| 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 |
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| 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: |
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| Volume: | Vol.33 | ||||
| Number: | No.5 | ||||
| Number of Pages: | 40 | ||||
| Page Range: | pp. 1106-1122 | ||||
| DOI: | 10.1016/j.jedc.2008.11.008 | ||||
| Status: | Peer Reviewed | ||||
| Publication Status: | Published | ||||
| Access rights to Published version: | Open Access |
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