A Study On The Characteristics Of Exchange Rate Fluctuations From The Perspective Of Behavioral Finance

The traditional exchange rate theory basing on the hypotheses of efficient market and rational expectations has in recent years been the victim of people's doubts and challenges. Challenging the validity of the two major theoretical premise—the assumptions of efficient market and rational expectations of traditional exchange rate theory, Behavioral finance theory of exchange rate takes the complexity of foreign exchange market and trading behavior heterogeneity as the breakthrough point, and carries out modeling, quantitative and simulation analysis on foreign exchange transactions. Which is helpful for us to gain the knowledge of non-rational fluctuation of foreign exchange market and the central bank moderate intervention that can eliminate or smooth the exchange rate expectation affected by short-term economic fluctuation having effect on the exchange rate. Which is an important theoretical innovation.Since 2002, the international community began to voice the appreciation of the RMB, followed by the U.S. government positive pressure, the appreciation voice gradually turned into the strong expectation of RMB appreciation at home and broad. The appreciation of RMB then embarked on the course of reality since the exchange rate system reform on July 21 2005, thereafter the RMB exchange rate against the U.S. dollars has experienced more than three years course of continued appreciation, the cumulative appreciation exceeded 20% meanwhile, but appreciation expectation of RMB in the international market has not disappeared. Since the 3rd quarter of 2008, subject to the sub-loan crisis in the United Sates into the global financial crisis, the exports of China are facing severe challenges, accordingly the relatively strong devaluation expectation of RMB burst out in the international market. Formation and reversal of the expected behavior of a typical financial study on the significance of herding characteristics, in this context, the research on the exchange rate fluctuations and the central bank intervention strategies from behavioral finance perspective has important practical significance.This paper has a systematic review on exchange rate decide theory firstly, and based on heterogeneity expectation and selection behavioral characteristics of the foreign exchange traders' and from the market traders' psychological and behavioral approach, this paper introduces early exchange rate models in the framework of the behavioral finance. Secondly, this paper describes the characteristics of structural system of RMB foreign exchange market after the reform of the RMB exchange rate system, followed by empirical research on the volatility of the RMB exchange rate features, the effectiveness of foreign exchange market and the impact of fundamental factors on the exchange rate, and the results show that the RMB exchange rate is inconsistent with the characteristics the traditional exchange rate theory described. Therefore this paper introduces and amends the exchange rate model under the framework of behavioral finance, using computer program to simulate the trace of the exchange rates and study on its regular change pattern, then expands the model by adding the central bank intervention into the model, this paper summarizes the different intervention strategies the central bank has on the exchange rate. Finally, this paper proposes the relevant policies such as strengthening the building of the foreign exchange market, improving the foreign exchange market liquidity, stability, market efficiency, and improving the central bank foreign exchange market intervention strategies.The research perspective and methods are innovative in this paper. From research perspective, the traditional theory of efficient market hypothesis and rational expectations hypothesis are abandoned in this paper and behavioral finance theory is put into the dynamic model of the exchange rate study. Because of the nonlinear and the random disturbance of the model, computer program design and simulation are introduced, through which, we can look more deeply into the inherent mechanism of exchange rate fluctuations. Of course, limited by time, energy and ability, there is still a lot of shortages. The paper shortage and the possible future research direction is to build models with the characteristics of the RMB foreign exchange market or looking for a specific parameters of RMB exchange rate model in order to better characterize the dynamic changes of RMB exchange rate features and give more effective and concrete central bank intervention strategies.