Bubbles and Crashes in a Behavioural Finance Model

Paul De Grauwe and Marianna Grimaldi ()
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Marianna Grimaldi: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

No 164, Working Paper Series from Sveriges Riksbank (Central Bank of Sweden)

Abstract: We develop a simple model of the exchange rate 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 contrast these "behavioural" bubbles with "rational" bubbles.

Keywords: exchange rate; bounded rationality; heterogeneous agents; bubbles and crashes; complex dynamics (search for similar items in EconPapers)
JEL-codes: F31 F41 G10 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2004-05-01
New Economics Papers: this item is included in nep-cbe, nep-fin, nep-fmk and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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http://www.riksbank.se/upload/WorkingPapers/WP_164.pdf (application/pdf)

Related works:
Working Paper: Bubbles and crashes in a Behavioural Finance Model (2005)
Working Paper: Bubbles and Crashes in a Behavioural Finance Model (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0164

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