Target zone models with stochastic realignments: an econometric evaluation

Research output: Contribution to journalArticle

23 Scopus citations

Abstract

This paper provides empirical support for the second generation of target zone models with stochastic devaluation risk. I propose a simple non-linear framework with a time varying probability of exchange rate realignment. This model nests alternatives (i) with no devaluation risk; (ii) with constant devaluation risk; and (iii) the random walk. I reject these three in favor of a stochastic realignment model where devaluation risk varies with economic fundamentals. The model predicts 13 of 17 realignments for the Franc and Lira, including an out-of-sample episode in August 1993.

Original languageEnglish (US)
Pages (from-to)641-657
Number of pages17
JournalJournal of International Money and Finance
Volume14
Issue number5
DOIs
Publication statusPublished - Jan 1 1995

    Fingerprint

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Cite this