Feedback analysis of speculation in a foreign currency market

This paper investigates the impact of speculative trading on foreign currency markets. A review of economic literature reveals that there is still no agreement to whether speculators amplify or tame fluctuations of exchange rates. Relevant system dynamics literature suggests that trading by speculators contributes to the formation of price bubbles. However, very few system dynamics papers exist that analyze financial markets at the micro-level of traders. Hence, we turn to the field of computational economics and adapt a well-known heterogeneous agent model. Our new system dynamics model is used to analyze the role of speculation in foreign currency markets.