Modeling the Exchange Rates in a Target Zone by Reflected Ornstein-Uhlenbeck Process
21 Pages Posted: 15 Jul 2012 Last revised: 2 Sep 2016
Date Written: September 1, 2016
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
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