Abstract:

Under reasonable assumptions about the way speculators process information, chaotic behavior is possible. The model developed allows us to formulate an alternative view concerning the role of news in the foreign exchange market to the view which today prevails among exchange rate theorists. However, the chaotic dynamics was obtained only for certain parameter configurations. For many other parameter values we obtained periodic solutions and limit cycles. Intuitively, a dynamical system exhibits chaos if in one sense there is unpredictability because it is sensitive dependent on initial values, but in another sense there is predictability, because it will be at a point, but we don’t know when.