A BEHAVIORAL FINANCE MODEL OF THE EXCHANGE RATE WITH MANY FORECASTING RULES

This paper presents a behavioral finance model of the exchange rate. Agents forecast theexchange rate by means of very simple rules. They can choose between three groups offorecasting rules: fundamentalist, extrapolative and momentum rules. Agents using afundamentalist rule are not able to observe the true value of the fundamental exchange andtherefore have to rely on an estimate of this variable to make a forecast. Based on simulationanalysis we find that two types of equilibria exist, a fundamental and a non-fundamental one...