Optimal Foreign Exchange Rate Intervention in Lévy Markets

Masimba Aspinas Mutakaya, Eriyoti Chikodza and Edward T. Chiyaka

International Journal of Stochastic Analysis, 2014, vol. 2014, 1-8

Abstract:

This paper considers an exchange rate problem in Lévy markets, where the Central Bank has to intervene. We assume that, in the absence of control, the exchange rate evolves according to Brownian motion with a jump component. The Central Bank is allowed to intervene in order to keep the exchange rate as close as possible to a prespecified target value. The interventions by the Central Bank are associated with costs. We present the situation as an impulse control problem, where the objective of the bank is to minimize the intervention costs. In particular, the paper extends the model by Huang, 2009, to incorporate a jump component. We formulate and prove an optimal verification theorem for the impulse control. We then propose an impulse control and construct a value function and then verify that they solve the quasivariational inequalities. Our results suggest that if the expected number of jumps is high the Central Bank will intervene more frequently and with large intervention amounts hence the intervention costs will be high.

Date: 2014
References: Add references at CitEc
Citations:

Downloads: (external link)
http://downloads.hindawi.com/journals/IJSA/2014/746815.pdf (application/pdf)
http://downloads.hindawi.com/journals/IJSA/2014/746815.xml (text/xml)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hin:jnijsa:746815

DOI: 10.1155/2014/746815

Access Statistics for this article

More articles in International Journal of Stochastic Analysis from Hindawi
Bibliographic data for series maintained by Mohamed Abdelhakeem ().