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

Author

Listed:
  • Oleg Korenok

    (Virginia Commonwealth University)

  • Stanislav Radchenko

    (University of North Carolina at Charlotte)

Abstract

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.

Suggested Citation

  • 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, University Library of Munich, Germany.
  • Handle: RePEc:wpa:wuwpem:0508015
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    target zone; oil price; exchange rate; stochastic volatility; griddy Gibbs; smooth transition;

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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