Skip to main content

Advertisement

Log in

The behavior of the exchange rate in the genetic algorithm with agents having long memory

  • Regular Article
  • Published:
Journal of Evolutionary Economics Aims and scope Submit manuscript

Abstract

This paper studies the behavior of the exchange rate in Kareken and Wallace (1981)'s model under the genetic algorithm adaptation with agents having long memory. The simulation results show that, if agents have full memory, the average portfolio fraction will converge, and the initial equilibrium that it converges to is history dependent. Under the lasting evolutionary pressure of the noise trader, the market will eventually drift from one equilibrium to another, and asymptotically will converge to the neighborhood of an equilibrium with agents putting their savings equally into two currencies. If the agents do not have full memory, the foreign exchange market will show periodic crisis. Before and after a market crises, the average portfolio fraction will converge to different stationary equilibria. A mean difference equation of the average portfolio fraction is also given to describe the dynamics of the model.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1
Fig. 2
Fig. 3
Fig. 4
Fig. 5
Fig. 6
Fig. 7
Fig. 8
Fig. 9
Fig. 10
Fig. 11
Fig. 12
Fig. 13
Fig. 14
Fig. 15

Similar content being viewed by others

Notes

  1. The reason we set the memory length at 400 is that we want to give GA enough time to settle down. However, if this number is too big, huge numbers of iterations will be needed in order to show the whole picture of the dynamics.

  2. Same as other simulations, in both experiments, the size of the candidate set is fixed at one half of the size of the strategy population.

References

  • Arifovic J (1996) The behavior of the exchange rate in the GA and experimental economies. J Polit Econ 104:510–541

    Article  Google Scholar 

  • Arifovic J, Gençay R (2000) Statistical properties of genetic learning in a model of exchange rate. J Econ Dyn Control 24:981–1005

    Article  Google Scholar 

  • Kandori M, Mailath G-J, Rob R (1993) Learning, mutation, and long-run equilibria in games. Econometrica 61:29–56

    Article  Google Scholar 

  • Kareken J-H, Wallace N (1981) On the indeterminacy of equilibrium exchange rates. Q J Econ 96:207–222

    Article  Google Scholar 

  • LeBaron B (2001) Volatility magnification and persistence in an agent based financial market, working paper, International Business School, Brandeis University

  • Lux T, Schornstein S (2004) Genetic learning as an explanation of stylized facts of foreign exchange markets, forthcoming in Journal of Mathematical Economics

  • Sargent T-J (1993) Bounded Rationality in Macroeconomics. Oxford University Press, Oxford

    Google Scholar 

  • Young HP (1993) Evolution of conventions. Econometrica 61:57–84

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Yiping Xu.

Additional information

The author thanks Jasmina Arifovic and Robert Jones for their helpful comments and suggestions. Support by the funding of “211 Project of UIBE” is gratefully acknowledged.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Xu, Y. The behavior of the exchange rate in the genetic algorithm with agents having long memory. J Evol Econ 16, 279–297 (2006). https://doi.org/10.1007/s00191-005-0006-0

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s00191-005-0006-0

JEL classification number

Keywords

Navigation