Constant elasticity of variance models with target zones

Liming Feng, Pingping Jiang and Yongjin Wang

Physica A: Statistical Mechanics and its Applications, 2020, vol. 537, issue C

Abstract: In this paper, we study a reflected constant elasticity of variance (RCEV) process with two-sided reflecting barriers for modeling the dynamics of a foreign exchange rate in a target zone. We derive a closed form expression for the transition density by using the spectral expansion method. Monte Carlo simulation shows that our method is accurate and efficient when the results are applied to compute the expected value of the process. Finally, we illustrate that ignoring target zones in the CEV model may lead to significant computational errors.

Keywords: Reflected CEV process; Target zone; Transition density; Spectral expansion; Whittaker function (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:537:y:2020:i:c:s0378437119315390

DOI: 10.1016/j.physa.2019.122702

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