Christian, Mueller-Kademann (2009): Puzzle solver.
Download (6MB) | Preview
This paper presents a model for asset markets with a subjectively rational solution for the price of the traded asset. Traders cannot act objectively rational and an increase in the number of traders does not enlarge the information set neccessary for determining the “true” price. Consequentely, many well-known “puzzles” vanish as there is no objective truth to which data could live up. An empirical test is conducted which demonstrates the relevance of the argument across time, space, and markets.
|Item Type:||MPRA Paper|
|Original Title:||Puzzle solver|
|Keywords:||rational expectations, uncertainty, Tobin tax, financial crisis|
|Subjects:||C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods; Simulation Methods
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F47 - Forecasting and Simulation: Models and Applications
F - International Economics > F3 - International Finance > F31 - Foreign Exchange
|Depositing User:||Christian Mueller-Kademann|
|Date Deposited:||13. Jan 2010 14:42|
|Last Modified:||12. Feb 2013 19:36|
Akram, Q. F., Rime, D. and Sarno, L. (2008). Arbitrage in the foreign exchange market: Turning on the microscope, Journal of International Economics 76(2): 237–253.
Ane, T. and Ureche-Rangau, L. (2008). Does trading volume really explain stock returns volatility?, Journal of International Financial Markets, Institutions and Money 18(3): 216–235.
Bacchetta, P. and van Wincoop, E. (2005). Rational Inattention: Solution to the Forward Discount Puzzle, Research Paper 156, International Center for Financial Asset and Engineering.
Barndorff-Nielsen, O. E. and Shepard, N. (2002). Econometric Analysis of Realised Volatility and its Use in Estimating Stochastic Volatility Modells, Journal of the Royal Statistical Society, Series B 64: 253 – 280.
Branch, W. A. (2004). The theory of rationally heterogenous expectations: Evidence from survey data, The Economic Journal 114: 592 – 621.
Cheung, Y.-W., Chinn, M. D. and Pascual, A. G. (2005). Empirical exchange rate models of the nineties: Are any fit to survive?, Journal of International Money and Finance 19: 1150 – 1175.
Cipriani, M. and Guarino, A. (2005). Herd Behavior in a Laboratory Financial Market, American Economic Review 95(5): 1427–1443.
Conlisk, J. (1996). Why bounded rationality?, Journal of Economic Literature 34(2): 669 – 700.
Downs, A. (1957). An Economic Theory of Democracy, Harper and Row, New York.
Drehmann, M., Oechssler, J. and Roider, A. (2005). Herding and Contrarian Behavior in Financial Markets: An Internet Experiment, American Economic Review 95(5): 1403–1426.
Dufwenberg, M., Lindqvist, T. and Moore, E. (2005). Bubbles and experience: An experiment, American Economic Review 95(5): 1731–1737.
Evans, M. D. D. and Lyons, R. K. (2002). Order flow and exchange rate dynamics, Journal of Political Economy 110(1): 170 – 180.
Friedman, M. (1953). The Case of Flexible Exchange Rated, in M. Friedman (ed.), Essays in Positive Economics, University of Chicago Press, Chicago, pp. 157–203.
Grauwe, P. D. and Kaltwasser, P. R. (2007). Modeling optimism and pessimism in the foreign exchange market, CESifo Working Paper Series 1962, CESifo GmbH.
Hartmann, P., Manna, M. and Manzanares, A. (2001). The microstructure of the euro money market, Journal of International Money and Finance 20(6): 895–948.
Hussam, R. N., Porter, D. and Smith, V. L. (2008). Thar She Blows: Can Bubbles Be Rekindled with Experienced Subjects?, American Economic Review 98(3): 924–937.
Ito, T., Lyons, R. K. and Melvin, M. T. (1998). Is There Private Information in the FX Market? The Tokyo Experiment, Journal of Finance 53(3): 1111–1130.
Lyons, R. K. (2001). Foreign exchange: macro puzzles, micro tools, Pacific Basin Working Paper Series 01-10, Federal Reserve Bank of San Francisco.
Nerlove, M. (1983). Expectations, Plans, and Realizations in Theory and Practice, Econometrica 51(2): 1251 – 1280.
Obstfeld, M. and Rogoff, K. (2000). The six major puzzles in international macroeconomics: Is there a common cause?, Working Paper 7777, National Bureau of Economic Research.
Pesaran, H. M. (1987). The Limits to Rational Expectations, Basil Blackwell, Oxford.
Salvatore, D. (2005). The euro-dollar exchange rate defies prediction, Journal of Policy Modelling 27(2): 455 – 464.
Shleifer, A. and Summers, L. H. (1990). The noise trader approach to finance, Journal of Economic Perspectives 4(2): 19 – 33.
Sims, C. (2005). Rational inattention: A research agenda, Discussion Paper, Series 1: Economic Studies 34, Deutsche Bundesbank.
Smith, V. L., Suchanek, G. L. and Williams, A. W. (1988). Bubbles, crashes, and endogenous expectations in experimental spot asset markets, Econometrica 56(5): 1119–51.
Taylor, M. P. (1995). The economics of exchange rates, Journal of Economic Literature 33(1): 13 – 47.
Tirole, J. (2002). Rational irrationality: Some economics of self-management, European Economic Review 46(4 – 5): 633 – 655.
Verma, R. and Verma, P. (2007). Noise trading and stock market volatility, Journal of Multinational Financial Management 17(3): 231–243.
Wang, P. and Jones, T. (2003). The Impossibility of Meaningful Efficient Market Parameters in Testing for the Spot–Foreward Relationship in Foreign Exchange Markets, Economics Letters 81: 81 – 87.