Heterogeneity of agents and exchange rate dynamics: Evidence from the EMS

Eelke De Jong, Willem F C Verschoor*, Remco C J Zwinkels

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review


We develop and estimate a dynamic heterogeneous agent model for the EMS period. Our empirical results suggest that the existence of heterogeneous interacting agents is indeed a possible explanation for the dynamics of exchange rates during the EMS. We find strong evidence of heterogeneous boundedly rational beliefs, and the fact that agents switch between these beliefs. Moreover, we show that the dynamic heterogeneous agent model outperforms the random walk and the static heterogeneous agents' model in out-of-sample forecasting in the large majority of country-horizon combinations.

Original languageEnglish
Pages (from-to)1652-1669
Number of pages18
JournalJournal of International Money and Finance
Issue number8
Publication statusPublished - Dec 2010


  • Agent-based finance
  • Heterogeneous expectations
  • Non-linear modelling
  • The European Monetary System

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