Nonparametric Empirical Evidence for Krugman's Target Zone Model

Sandro Claudio Lera and Didier Sornette
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Sandro Claudio Lera: ETH Zurich
Didier Sornette: ETH Zurich and Swiss Finance Institute

No 15-22, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Krugman(1991)’s target zone model has become the reference of a large part of this literature. Despite its simplicity and elegance, empirical evidence has been lacking. Deriving from Krugman’s model analytical expressions for the conditional volatility and density distribution close to the target zone limit, we present clear and direct evidence that the bounded EUR/CHF exchange rate between September 2011 and January 2015 was quantitatively well described by Krugman’s model. Krugman’s target zone model holds after all, but apparently only under extreme and sustained pressure that pushes continuously the exchange rate very close to the boundary of the target zone.

Keywords: Exchange rate dynamics; target zone; conditional volatility (search for similar items in EconPapers)
JEL-codes: E50 E51 E52 E58 (search for similar items in EconPapers)
Pages: 3 pages
Date: 2015-07
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1522

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