The Target Zone Model, Non-Linearity And Mean Reversion: Is The Honeymoon Really Over?  

Oleh:

Iannizzotto, Matteo ; Taylor, Mark P.

Jenis: Article from Journal - ilmiah internasional
Dalam koleksi: The Economic Journal (EBSCO) vol. 109 no. 454 (Mar. 1999), page 96-110.
Fulltext: 96.pdf (303.71KB)

Isi artikel

We estimate a target zone model for three ERM exchange rates for 1983±6 and 1987±91 by the method of simulated moments, taking account of the continuous time speci®cation by using daily data with the interruptions of holidays and weekends. Speci®cation tests are unable to reject the model. The estimates imply, however, an essentially linear relationship between the exchange rate and the fundamentals, with a very limited `honeymoon effect'. Using Monte Carlo simulations, calibrated on the estimates, we ®nd that standard tests for mean reversion of the exchange rate would largely reject the target zone model when, in fact, it held.

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