Exchange rate dynamics under state-contingent stochastic process switching

Anna Naszodi

Journal of International Money and Finance, 2011, vol. 30, issue 5, 896-908

Abstract: This paper offers a closed-form solution of a process switching problem, i.e., switching the exchange rate regime from free-floating to a completely fixed one. An example of such regime change is the adoption of the Euro. In contrast to previous studies on the subject, this paper analyzes a specific case when foreign exchange market participants consider both the Euro locking rate and locking date as uncertain. Preceding the locking, the exchange rate is determined by three factors: fundamental, market expectations for the Euro locking rate, and date. The model is used to examine the conditions under which the exchange rate volatility is mitigated by the prospect of locking.

Keywords: Stochastic; process; switching; Eurozone; entry; Exchange; rate; stabilization (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:30:y:2011:i:5:p:896-908

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