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Trigger Strategies and Price Dynamics in Equity and Foreign Exchange Markets

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Author Info
Paul R. Krugman

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Abstract

Trigger strategist-s may be defined as act-ors in asset markets who buy or sell when the price reaches a predetermined level ; t-hey include participants in portfolio insurance schemes in equity markets and central banks who intervene to defend an exchange rate target zone. This paper presents an approach to modeling the effects of trigger strategists, with emphasis on how target zones affect market expectations. It is shown that a commitment to defend a target zone will generate stabilizing expectations within the band, which may generate a "target zone honeymoon" . an extended period in which the announcement of a target. zone stabilizes exchange rates without any need for action on the part of authorities. However, an imperfectly credible target zone is vulnerable to crises in which the market tests the authorities' resolve.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2459.

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Date of creation: Dec 1987
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Handle: RePEc:nbr:nberwo:2459

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Robert P. Flood & Peter M. Garber, 1983. "A Model of Stochastic Process Switching," NBER Working Papers 0626, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Mussa, Michael, 1979. "Empirical regularities in the behavior of exchange rates and theories of the foreign exchange market," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 11(1), pages 9-57, January. [Downloadable!] (restricted)
  3. Connolly, Michael B & Taylor, Dean, 1984. "The Exact Timing of the Collapse of an Exchange Rate Regime and Its Impact on the Relative Price of Traded Goods," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(2), pages 194-207, May. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Barry Eichengreen & Peter Garber, 1990. "Before the Accord: U.S. Monetary-Financial Policy 1945-51," NBER Working Papers 3380, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Dorofeev Evgeny, 2000. "Economic Factors Influence on the Russian Capital Market Behavior," EERC Working Paper Series 2k-03e, EERC Research Network, Russia and CIS. [Downloadable!]
  3. A. Kanas, 2003. "Non-linear cointegration between stock prices and dividends," Applied Economics Letters, Taylor and Francis Journals, vol. 10(7), pages 401-405, May. [Downloadable!] (restricted)
  4. Bekiros, S. & Georgoutsos, D., 2006. "Direction-of-Change Forecasting using a Volatility- Based Recurrent Neural Network," CeNDEF Working Papers 06-16, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance. [Downloadable!]
    Other versions:
  5. Tro Kortian, 1995. "Modern Approaches to Asset Price Formation: A Survey of Recent Theoretical Literature," RBA Research Discussion Papers rdp9501, Reserve Bank of Australia. [Downloadable!]
  6. Paul R. Krugman, 1988. "Deindustrialization, Reindustrialization, and the Real Exchange Rate," NBER Working Papers 2586, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Kathryn M. Dominguez & Peter B. Kenen, 1993. "Intramarginal Intervention in the EMS and the Target-Zone Model of Exchange-Rate Behavior," NBER Working Papers 3670, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. Willem H. Buiter & Paolo A. Pesenti, 1990. "Rational Speculative Bubbles in an Exchange Rate Target Zone," NBER Working Papers 3467, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  9. António Portugal Duarte & João Sousa Andrade & Adelaide Duarte, 2008. "Exchange Rate and Interest Rate Volatility in a Target Zone: The Portuguese Case," GEMF Working Papers 2008-03, GEMF - Faculdade de Economia, Universidade de Coimbra. [Downloadable!]
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