Heterogeneity of Agents: Explaining Exchange Rates since the Introduction of the Euro

The Heterogeneous Agent Model has been analyzed since the introduction of the Euro. Three exchange rates have been examined, €/$, €/£ and €/¥. The model without a switching mechanism, whereby agent decide which strategy to use by looking on past profitability, has no explaining power. However the results improve when estimating the second step of the model, including the switching mechanism. The results show evidence of a market with heterogeneous agents. The results for the €/£ and €/¥, including the switching mechanism, exchange rates seem promising. However the model can not explain the €/$ behaviour. Furthermore are some extensions been analyzed estimated upon the model, which improve some of the results. Further does the out of sample forecast of the $/¥ exchange rate using the Heterogeneous Agent Model not outperform the random walk.