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

Oleg Korenok () and Stanislav I. Radchenko ()

Econometrics from EconWPA

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.

Keywords: target zone; oil price; exchange rate; stochastic volatility; griddy Gibbs; smooth transition (search for similar items in EconPapers)
JEL-codes: C52 Q38 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: 2005-08-18
Note: Type of Document - pdf; pages: 31
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Working Paper: The smooth transition autoregressive target zone model with the Gaussian stochastic volatility and TGARCH error terms with applications (2005)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpem:0508015

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