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Tag Archives: Exchange Rates

Market Dynamics and the Forward Premium Anomoly: A Model of Interacting Agents

By Phillip Hogan

This paper presents a stochastic model of exchange rates, which is used to explain the forward premium anomaly. In the model, agents switch between four trading strategies, and these changes drive the evolution of the exchange rate. This framework is meant to more realistically represent the important market dynamics of exchange rates, as we suspect these to be the cause of the forward premium anomaly. Our simulations of the model indicate two conclusions: (i) many of the statistical regularities observed in currency markets, including the forward premium anomaly, can be thought of as macro-level scaling laws emerging from micro-level interactions of heterogeneous agents, and (ii) the dynamics of estimates of the beta coefficient in tests of UIP are driven by perceived relationships between changes in interest rates and agents’ aggregate views on the value of the exchange rate, which we call the fundamental value. Section I presents an introduction to the topic and section II reviews the relevant literature. Section III provides the theoretical basis of the forward premium anomaly and our model, then the mathematical definition of the model. Section IV presents the results of a typical simulation which section V compares to relevant stylized facts of the currency markets. Sections VI and VII present our results and a conclusion of what we have drawn from the model.

Honors Thesis

Advisor: Craig Burnside, Michelle Connolly | JEL Codes: G1, G13, G15 | Tagged: Exchange Rates, Forward Premium Anomaly

Market Dynamics and the Forward Premium Anomoly: A Model of Interacting Agents

By Evan Myer

This paper presents a stochastic model of exchange rates, which is used to explain the forward premium anomaly. In the model, agents switch between four trading strategies, and these changes drive the evolution of the exchange rate. This framework is meant to more realistically represent the important market dynamics of exchange rates, as we suspect these to be the cause of the forward premium anomaly. Our simulations of the model indicate two conclusions: (i) many of the statistical regularities observed in currency markets, including the forward premium anomaly, can be thought of as macro-level scaling laws emerging from micro-level interactions of heterogeneous agents, and (ii) the dynamics of estimates of the beta coefficient in tests of UIP are driven by perceived relationships between changes in interest rates and agents’ aggregate views on the value of the exchange rate, which we call the fundamental value. Section I presents an introduction to the topic and section II reviews the relevant literature. Section III provides the theoretical basis of the forward premium anomaly and our model, then the mathematical definition of the model. Section IV presents the results of a typical simulation which section V compares to relevant stylized facts of the currency markets. Sections VI and VII present our results and a conclusion of what we have drawn from the model.

Honors Thesis

Advisor: Craig Burnside | JEL Codes: G1,G13, G15 | Tagged: Exchange Rates, Forward Premium Anomoly

Martin Bronfenbrenner and Japan’s Post-WWII Economic Recovery

By Nitish Basandra

This paper explores the economic recovery of post-World War II Japan through the eyes of the late Duke professor and American economist Martin Bronfenbrenner. Specifically, we address the period of US Occupation from 1947-1952, detailing how Bronfenbrenner sensitized America to Japanese economics. Along the way, Bronfenbrenner faced several obstacles as his loyalty to the US was questioned due to his growing attachment to the Japanese culture and passion for its crisis. Using a methodological approach, we begin with Bronfenbrenner’s initial encounter with a fallen Japan, and conclude with a thorough analysis of his vision for Japan’s reconstruction.

View Thesis

Advisor: E. Roy Weintraub | Tagged: Economic Relations, Exchange Rates, International Economics, Martin Bronfenbrenner, Occupation, Recovery, Trade, US-Japan

Questions?

Undergraduate Program Assistant
Jennifer Becker
dus_asst@econ.duke.edu

Director of the Honors Program
Michelle P. Connolly
michelle.connolly@duke.edu