Autore
Wuthe, Norbert

Titolo
Exchange rate volatility: The impact of learning behaviour and the institutional framework : a market microstructure approach
Periodico
European University Institute of Badia Fiesolana (Fi). Department of Economics - Working papers
Anno: 1999 - Fascicolo: 44 - Pagina iniziale: 1 - Pagina finale: 102

Traditional macroeconomic models fail to explain short- and medium-terni volatility of foreign exchange rates. Following thè new strand of market microstructure approaches to thè problem, we model thè dynamic optimization problem of a monopolistic market maker who faces uncertainty about some fundamental pa-rameter and whose foreign currency position has to be closed by thè end of thè day. The set-up allows to identify an unambiguously positive effect thè institutional framework may exert on exchange rate volatility. Furthermore we find that a simplistic, adaptive learning behavior is a likely candidate for explaining observed pricing patterns. When completed by competition thè model reveals incentives to choose less rational ways of behavior.




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