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An EMS target zone model in discrete time

Author

Listed:
  • 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.

Suggested Citation

  • Kees G. Koedijk & Philip A. Stork & Casper G. De Vries, 1998. "An EMS target zone model in discrete time," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(1), pages 31-48.
  • Handle: RePEc:jae:japmet:v:13:y:1998:i:1:p:31-48
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    File URL: http://qed.econ.queensu.ca:80/jae/1998-v13.1/
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. 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.
    2. Francisco J. Ruge-Murcia, 2000. "Uncovering financial markets' beliefs about inflation targets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., pages 483-512.
    3. 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.
    4. Pesaran, M. Hashem & Samiei, Hossein, 1995. "Limited-dependent rational expectations models with future expectations," Journal of Economic Dynamics and Control, Elsevier, pages 1325-1353.
    5. 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.
    6. Hotte, Louis & Winer, Stanley L, 2001. "Political Influence, Economic Interests and Endogenous Tax Structure in a Computable Equilibrium Framework: With Application to the United States, 1973 and 1983," Public Choice, Springer, vol. 109(1-2), pages 69-99, October.
    7. Vlaar, P. J. G. & Palm, F. C., 1997. "Inflation differentials and excess returns in the European Monetary System," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 7(1), pages 1-20, April.
    8. Neely, Christopher J., 1999. "Target zones and conditional volatility: The role of realignments," Journal of Empirical Finance, Elsevier, pages 177-192.
    9. Catherine S. Forbes & Paul Kofman, 2000. "Bayesian Target Zones," Research Paper Series 32, Quantitative Finance Research Centre, University of Technology, Sydney.
    10. Francisco J. Ruge-Murcia, 2000. "Uncovering financial markets' beliefs about inflation targets," Journal of Applied Econometrics, John Wiley & Sons, Ltd., pages 483-512.
    11. Peter Carr & Zura Kakushadze, 2015. "FX Options in Target Zone," Papers 1512.01527, arXiv.org, revised Jul 2016.
    12. Neely, Christopher J., 1999. "Target zones and conditional volatility: The role of realignments," Journal of Empirical Finance, Elsevier, pages 177-192.
    13. Anthony D. Hall & Paul Kofman & Ron 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.
    14. 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, pages 105-125.
    15. 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.

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