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The smooth transition autoregressive target zone model with the Gaussian stochastic volatility and TGARCH error terms with applications

  • Oleg Korenok

    ()

    (Department of Economics, VCU School of Business)

  • Stanislav Radchenko

    ()

    (Department of Economics, University of North Carolina at Charlotte)

This paper proposes to model the error term in smooth transition autoregressive target zone model as Gaussian with stochastic volatility (STARTZ-SV) or as Student-t with GARCH volatility (STARTZ-TGARCH). Using the dynamics of Norwegian krone exchange rate index, we show that both models produce standardized residuals that are closer to assumed distributions and do not produce a hump in the estimated marginal distribution of exchange rate which is more consistent with theoretical predictions. We apply developed models to test whether the dynamics of oil price can be well approximated by the Krugman’s target zone model. Our estimates of conditional volatility and marginal distribution reject the target zone hypothesis.

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File URL: http://www.people.vcu.edu/~okorenok/repec_files/startz_mar10_08.pdf
File Function: First version, 2005
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Paper provided by VCU School of Business, Department of Economics in its series Working Papers with number 0505.

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Length: 31 pages
Date of creation: Aug 2005
Date of revision:
Handle: RePEc:vcu:wpaper:0505
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