An EMS target zone model in discrete time

Kees G. Koedijk, Philip Stork and Casper de Vries
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Kees G. Koedijk: Maastricht University, PO Box 616, 6200 MD, Maastricht, The Netherlands, Postal: Maastricht University, PO Box 616, 6200 MD, Maastricht, The Netherlands

Journal of Applied Econometrics, 1998, vol. 13, issue 1, 31-48

Abstract: The discrete time analogue of the continuous time Krugman target zone model is developed in order to capture the typical volatility clusters and fat-tailed distributed innovations of exchange rates. It is shown that under these more general stochastic conditions the S-shaped relation between exchange rate and fundamentals is preserved, but is less pronounced. The model is tested for its S-shape and stochastic properties. Two clearly distinct sets of EMS currencies are detected on the basis of the curvature features. One-step-ahead realignment probabilities are used as an alternative evaluation method. © 1998 John Wiley & Sons, Ltd.

Date: 1998
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