Modeling the Exchange Rates in a Target Zone by Reflected Ornstein-Uhlenbeck Process

Yang, Xuewei; Ren, Guijun; Wang, Yongjin; Bo, Lijun; Li, Dongxing

doi:10.2139/ssrn.2107686

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Modeling the Exchange Rates in a Target Zone by Reflected Ornstein-Uhlenbeck Process

21 Pages Posted: 15 Jul 2012 Last revised: 2 Sep 2016

See all articles by Xuewei Yang

Xuewei Yang

Nanjing University - School of Management and Engineering; Nanjing University - Institute of New Finance

Dongxing Li

Nanjing University - School of Management and Engineering

Date Written: September 1, 2016

Abstract

In this paper, we model the exchange rate in a target zone by a so-called reflected Ornstein-Uhlenbeck process. A simulation-based maximum likelihood estimation strategy of the parameters involved in the model is proposed and studied. The model fits data on exchange rates in the European Monetary System well.

Keywords: Reflected diffusion, Ornstein-Uhlenbeck processes, exchange rate, target zone, maximum likelihood estimation, Monte Carlo simulation

JEL Classification: C13, C15, F31

Suggested Citation: Suggested Citation

Yang, Xuewei and Ren, Guijun and Wang, Yongjin and Bo, Lijun and Li, Dongxing, Modeling the Exchange Rates in a Target Zone by Reflected Ornstein-Uhlenbeck Process (September 1, 2016). Available at SSRN: https://ssrn.com/abstract=2107686 or http://dx.doi.org/10.2139/ssrn.2107686