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Summary: An alternative look at exchange rate determination
Comment: This book takes a behavioral look at exchange rate determination. It should be of interest to academics as well as provide some interesting ideas for those of us who analyze exchange rates practically. Not for beginners. It has been given three stars only because of its narrow focus, not because in any way the quality is lacking.
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Summary: fractals, evolution and chaos
Comment: The route taken by the authors is to try to understand foreign exchange rates, using deterministic and stochastic models. Where both involve numerical simulations. These are shown to yield basins of attraction, in the spirit of much research on fractals done in other fields.
The fragility of the simulation results with respect to initial conditions is also studied. With efforts made to apply these to such real world variables as transaction costing and arbitrage.
The authors take modelling one stage further by applying evolutionary game theory perspectives. To give dynamical behaviour that they find quite interesting. Including the existence of chaos.
This book provides an alternative view of the workings of foreign exchange markets. The authors' modeling approach is based on the idea that agents use simple forecasting rules and switch to those rules that have been shown to be the most profitable in the past. This selection mechanism is based on trial and error and is probably the best possible strategy in an uncertain world, the authors contend. It creates a rich dynamic in the foreign exchange markets and can generate bubbles and crashes. Sensitivity to initial conditions is a pervasive force in De Grauwe and Grimaldi's model. It explains why large exchange-rate changes and volatility clustering occur. It also has important implications for understanding how the news affects the exchange rate. De Grauwe and Grimaldi conclude that news in fundamentals has an unpredictable effect on the exchange rate. Sometimes, they maintain, it alters the exchange rate considerably; at other times it has no effectwhatsoever. The authors also use their model to analyze the effects of official interventions in the foreign exchange market. They show that simple intervention rules of the "leaning-against-the-wind" variety can be effective in eliminating bubbles and crashes in the exchange rate. They further demonstrate how, quite paradoxically, by intervening in the foreign exchange market the central bank makes the market look more efficient. Clear and comprehensive, The Exchange Rate in a Behavioral Finance Framework is a must-have for analysts in foreign exchange markets as well as students of international finance and economics.
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