An EMS Target Zone Model in Discrete Time

Journal of Applied Econometrics, Vol. 13, pp. 31.48, 1998

Posted: 28 Feb 2008

See all articles by Kees C. G. Koedijk

Kees C. G. Koedijk

Tilburg University - Department of Finance

Philip A. Stork

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Casper G. de Vries

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; CESifo (Center for Economic Studies and Ifo Institute)

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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 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 curvature features. One-step-ahead realignment probabilities are used as an alternative evaluation method.

Keywords: EMS currencies, fat tails, realignment probability

JEL Classification: G10, G15

Suggested Citation

Koedijk, Kees G. and Stork, Philip A. and De Vries, Casper, An EMS Target Zone Model in Discrete Time. Journal of Applied Econometrics, Vol. 13, pp. 31.48, 1998, Available at SSRN: https://ssrn.com/abstract=1097735

Kees G. Koedijk

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 4663048 (Phone)
+31 13 4662052 (Fax)

Philip A. Stork (Contact Author)

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Casper De Vries

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
+31 10 408 8956 (Phone)
+31 10 408 9147 (Fax)

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands
+31 10 408 8956 (Phone)
+31 10 408 9147 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

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