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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)

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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Bibliographic 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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Cited by:
  1. Beum-Jo Park, 2002. "Asymmetric Volatility of Exchange Rate Returns Under The EMS: Some Evidence From Quantile Regression Approach for Tgarch Models," International Economic Journal, Taylor & Francis Journals, vol. 16(1), pages 105-125.
  2. 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.
  3. RUGE-MURCIA, Francisco J., 1998. "Uncovering Financial Markets Beliefs About Inflation Targets," Cahiers de recherche 9803, Universite de Montreal, Departement de sciences economiques.
  4. Christopher J. Neely, 1998. "Target zones and conditional volatility: the role of realignments," Working Papers 1994-008, Federal Reserve Bank of St. Louis.
  5. Catherine S. Forbes & Paul Kofman, 2000. "Bayesian Target Zones," Research Paper Series 32, Quantitative Finance Research Centre, University of Technology, Sydney.
  6. Oleg Korenok & Stanislav Radchenko, 2005. "The smooth transition autoregressive target zone model with the Gaussian stochastic volatility and TGARCH error terms with applications," Working Papers 0505, VCU School of Business, Department of Economics.
  7. M. Hashem Pesaran & Francisco J. Ruge-Murcia, 1996. "Limited-dependent rational expectations models with jumps," Discussion Paper / Institute for Empirical Macroeconomics 111, Federal Reserve Bank of Minneapolis.
  8. Darvas, Zsolt, 1999. "Az árfolyamsávok empirikus modelljei és a devizaárfolyam sávon belüli előrejelezhetetlensége
    [Empirical models of exchange rate target zones]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(6), pages 507-529.
  9. Forbes, C.S. & Kofman, P., 2000. "Bayesian Soft Target Zones," Monash Econometrics and Business Statistics Working Papers 4/00, Monash University, Department of Econometrics and Business Statistics.

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