An Exchange Rate Target Zone Model with a Terminal Condition and Mean-Reverting Fundamentals
Economics
2015-06-17 v1 Probability
Abstract
This paper proposes a target zones exchange rate model with a terminal condition of entering a currency zone. It is assumed that the exchange rate is a function of the fundamental and time. Another essential assumptions of the model is that the fundamental process is bounded inside a band and that terminal condition for the exchange rate holds. The fundamental is specified in two ways: as a regulated Brownian motion and Ornstein-Uhlenbeck processes. For the case of the Brownian motion process the closed form solution of the problem is obtained, whereas for the Ornstein-Uhlenbeck process the closed form solution does not exist, therefore we had to use numerical method for solving of the problem. Both specifications are compared numerically.
Keywords
Cite
@article{arxiv.1506.04880,
title = {An Exchange Rate Target Zone Model with a Terminal Condition and Mean-Reverting Fundamentals},
author = {Viktors Ajevskis},
journal= {arXiv preprint arXiv:1506.04880},
year = {2015}
}