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Exchange rate dynamics under state-contingent stochastic process switching

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  • Naszodi, Anna

Abstract

This paper offers a closed-form solution of a process switching problem, i.e., switching the exchange rate regime from free-floating to a completely fixed one. An example of such regime change is the adoption of the Euro. In contrast to previous studies on the subject, this paper analyzes a specific case when foreign exchange market participants consider both the Euro locking rate and locking date as uncertain. Preceding the locking, the exchange rate is determined by three factors: fundamental, market expectations for the Euro locking rate, and date. The model is used to examine the conditions under which the exchange rate volatility is mitigated by the prospect of locking.

Suggested Citation

  • Naszodi, Anna, 2011. "Exchange rate dynamics under state-contingent stochastic process switching," Journal of International Money and Finance, Elsevier, vol. 30(5), pages 896-908, September.
    • Handle: RePEc:eee:jimfin:v:30:y:2011:i:5:p:896-908
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    Cited by:

    1. Stéphane Goutte & Benteng Zou, 2012. "Continuous time regime switching model applied to foreign exchange rate," Working Papers hal-00643900, HAL.
    2. Naszodi, Anna, 2010. "Testing the asset pricing model of exchange rates with survey data," Working Paper Series 1200, European Central Bank.
    3. Malika Hamadi & Andreas Heinen, 2011. "Ownership Structure and Firm Performance : Evidence from a non-parametric panel," DEM Discussion Paper Series 11-16, Department of Economics at the University of Luxembourg.
    4. T. G. Saji, 2019. "Can BRICS Form a Currency Union? An Analysis under Markov Regime-Switching Framework," Global Business Review, International Management Institute, vol. 20(1), pages 151-165, February.
    5. Reher, Gerrit & Wilfling, Bernd, 2014. "The valuation of European call options on zero-coupon bonds in the run-up to a fixed exchange-rate regime," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 483-496.

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