Koedijk, KeesG., Stork, PhilipA. and De Vries, CasperG. (1998). An EMS target zone model in discrete time Journal of Applied Econometrics, 13(1):31--48.
-
Affiliated authorsPhilip Stork, Casper de Vries
-
Publication year1998
-
JournalJournal of Applied Econometrics
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.