Was the Honeymoon Effect Effective? An Analysis of the EMS Target Zone
Allan Bødskov Andersen ()
Additional contact information
Allan Bødskov Andersen: Danmarks Nationalbak, Postal: Havnegade 5, 1093 København K, Denmark
No 00-13, Finance Working Papers from University of Aarhus, Aarhus School of Business, Department of Business Studies
Abstract:
This paper presents an analysis of the basis target zone model, using data from three core EMS members. Recent research har argued that the model may not perform empirically as bad as previous investigation have suggested. In order to investigate this point, we first estimate the model by a nonparametric density matching procedure, and extract the implied drift and diffusion function for the exchange rate process. This allows us to view the target zone model essentially as a time series model, with a clearly defined diffusion process governing target zone exchange rates. We then compare the implied drift and diffusion function with their nonparametric estimates. We conclude that exchange rates under consideration are actually more mean reverting than the target zone model predicts. When very close to the intervention limits, the data are far from the target zone model's implications. We perform a Monte Carlo study, which documents that our methodology is indeed able to capture the potential non-linearities in the drift and diffusion predicted by the theory.
Keywords: Targets zones; Diffusion process; Nonparametric estimation (search for similar items in EconPapers)
Pages: 33 pages
Date: 2000-08-22
References: Add references at CitEc
Citations: View citations in EconPapers (1)
Downloads: (external link)
http://www.hha.dk/fin/finance/Research/D00_13.PDF (application/pdf)
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:hhb:aarfin:2000_013
Access Statistics for this paper
More papers in Finance Working Papers from University of Aarhus, Aarhus School of Business, Department of Business Studies The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark. Contact information at EDIRC.
Bibliographic data for series maintained by Helle Vinbaek Stenholt ( this e-mail address is bad, please contact ).