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An EMS target zone model in discrete time

✍ Scribed by Kees G. Koedijk; Philip A. Stork; Casper G. De Vries

Publisher
John Wiley and Sons
Year
1998
Tongue
English
Weight
216 KB
Volume
13
Category
Article
ISSN
0883-7252

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✦ Synopsis

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.

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