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A time series model for an exchange rate in a target zone with applications

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Author Info

  • Lundbergh, Stefan

    ()
    (Skandia Life Insurance Company Ltd)

  • Teräsvirta, Timo

    ()
    (Dept. of Economic Statistics, Stockholm School of Economics)

Abstract

In this paper we introduce a flexible target zone model that is capable of characterizing the dynamic behaviour of an exchange rate implied by the original target zone model of Krugman (1991) and its modifications. Our framework also enables the modeller to estimate an implicit target zone if it exists. A modelling cycle consisting of specification, estimation, and evaluation stages is constructed. The model is fitted to series of daily observations of the Swedish and Norwegian currency indices and the estimated models are evaluated.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 533.

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Length: 37 pages
Date of creation: 03 Sep 2003
Date of revision:
Publication status: Published in Journal of Econometrics, 2006, pages 579-609.
Handle: RePEc:hhs:hastef:0533

Contact details of provider:
Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-(0)8-736 90 00
Fax: +46-(0)8-31 01 57
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Web page: http://www.hhs.se/
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Keywords: Autoregressive conditional heteroskedasticity; exchange rate dynamics; nonlinear modelling; smooth transition autoregression;

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References

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  1. Lin, Chien-Fu Jeff & Terasvirta, Timo, 1994. "Testing the constancy of regression parameters against continuous structural change," Journal of Econometrics, Elsevier, Elsevier, vol. 62(2), pages 211-228, June.
  2. Eitrheim, Øyvind & Teräsvirta, Timo, 1995. "Testing the Adequacy of Smooth Transition Autoregressive Models," Working Paper Series in Economics and Finance, Stockholm School of Economics 56, Stockholm School of Economics.
  3. Fiorentini,G. & Calzolari,G. & Panattoni,L., 1995. "Analytic Derivatives and the Computation of Garch Estimates," Papers, Centro de Estudios Monetarios Y Financieros- 9519, Centro de Estudios Monetarios Y Financieros-.
  4. Stefan Lundbergh & Timo Teräsvirta, 1999. "Evaluating GARCH Models," Tinbergen Institute Discussion Papers, Tinbergen Institute 99-008/4, Tinbergen Institute.
  5. repec:sae:niesru:v:167:y::i:1:p:106-112 is not listed on IDEAS
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  8. Bekaert, G.R.J. & Gray, S.F., 1997. "Target zones and exchange rates: An empirical investigation," Discussion Paper, Tilburg University, Center for Economic Research 1997-22, Tilburg University, Center for Economic Research.
  9. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, Elsevier, vol. 31(3), pages 307-327, April.
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  13. Forbes, C.S. & Kofman, P., 2000. "Bayesian Soft Target Zones," Monash Econometrics and Business Statistics Working Papers, Monash University, Department of Econometrics and Business Statistics 4/00, Monash University, Department of Econometrics and Business Statistics.
  14. Klaster, Michel A. & Knot, Klaas H. W., 2002. "Toward an econometric target zone model with endogenous devaluation risk for a small open economy," Economic Modelling, Elsevier, Elsevier, vol. 19(4), pages 509-529, August.
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  16. Lars E.O. Svensson, 1991. "Assessing Target Zone Credibility: Mean Reversion and Devaluation Expectations in the ERM 1979-1992," NBER Working Papers 3795, National Bureau of Economic Research, Inc.
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  22. Chung, Chae-Shick & Tauchen, George, 2001. "Testing Target-Zone Models Using Efficient Method of Moments: Reply," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 19(3), pages 276-77, July.
  23. Taylor, Mark P. & Iannizzotto, Matteo, 2001. "On the mean-reverting properties of target zone exchange rates: a cautionary note," Economics Letters, Elsevier, Elsevier, vol. 71(1), pages 117-129, April.
  24. Iannizzotto, Matteo & Taylor, Mark P, 1999. "The Target Zone Model, Non-linearity and Mean Reversion: Is the Honeymoon Really Over?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 109(454), pages C96-110, March.
  25. Brooks, Chris & Reveiz, Alejandro H., 2002. "A model for exchange rates with crawling bands--an application to the Colombian peso," Journal of Economics and Business, Elsevier, Elsevier, vol. 54(5), pages 483-503.
  26. Lindberg, Hans & Soderlind, Paul, 1994. "Testing the basic target zone model on Swedish data 1982-1990," European Economic Review, Elsevier, Elsevier, vol. 38(7), pages 1441-1469, August.
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