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An EMS target zone model in discrete time

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Author Info
Kees G. Koedijk (Maastricht University, PO Box 616, 6200 MD, Maastricht, The Netherlands)
Philip A. Stork (MeesPierson, PO Box 243, 1000 AE Amsterdam, The Netherlands)
Casper G. De Vries (Tinbergen Instituut Rotterdam, PO Box 1738, 3000 DR Rotterdam, The Netherlands)

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Abstract

The discrete time analogue of the continuous time Krugman target zone model is developed in order to capture the typical volatility clusters and fat-tailed distributed innovations of exchange rates. It is shown that under these more general stochastic conditions the S-shaped relation between exchange rate and fundamentals is preserved, but is less pronounced. The model is tested for its S-shape and stochastic properties. Two clearly distinct sets of EMS currencies are detected on the basis of the curvature features. One-step-ahead realignment probabilities are used as an alternative evaluation method. © 1998 John Wiley & Sons, Ltd.

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File URL: http://qed.econ.queensu.ca:80/jae/1998-v13.1/
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 13 (1998)
Issue (Month): 1 ()
Pages: 31-48
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Handle: RePEc:jae:japmet:v:13:y:1998:i:1:p:31-48

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  1. Forbes, C.S. & Kofman, P., 2000. "Bayesian Soft Target Zones," Monash Econometrics and Business Statistics Working Papers 4/2000, Monash University, Department of Econometrics and Business Statistics. [Downloadable!]
  2. Christopher J. Neely, 1998. "Target zones and conditional volatility: the role of realignments," Working Papers 1994-008, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  3. Beum-Jo Park, 2002. "Asymmetric Volatility Of Exchange Rate Returns Under The Ems: Some Evidence From Quantile Regression Appoach For Tgarch Models," International Economic Journal, Korean International Economic Association, vol. 16(1), pages 105-125, April. [Downloadable!] (restricted)
  4. Catherine S. Forbes & Paul Kofman, 2000. "Bayesian Target Zones," Econometric Society World Congress 2000 Contributed Papers 0575, Econometric Society. [Downloadable!]
  5. Robert F. Engle & Yin-Feng Gau, 1997. "Conditional Volatility of Exchange Rates Under a Target Zone," University of California at San Diego, Economics Working Paper Series 97-06, Department of Economics, UC San Diego. [Downloadable!]
  6. Oleg Korenok & Stanislav Radchenko, 2005. "The smooth transition autoregressive target zone model with the Gaussian stochastic volatility and TGARCH error terms with applications," Econometrics 0508015, EconWPA. [Downloadable!]
    Other versions:
  7. Anthony D. Hall & Paul Kofman & R. Guido, 1998. "Limits to Linear Price Behaviour: Target Zones for Futures Prices Regulated By Limits," Research Paper Series 3, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
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