Optimal stochastic intervention control with application to the exchange rate

Mundaca, Gabriela; Øksendal, Bernt

doi:10.1016/s0304-4068(97)00013-x

Cited by 89 publications

(66 citation statements)

References 7 publications

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“…This multi-dimensional control problem has been proposed and studied in various forms in different context of risk management, from optimal cash management [6] to inventory controls [14,13,34,33]. More recent papers in the literature of mathematical finance include those on transaction cost in portfolio management [2,19,20,9,25,28], insurance models [16,4], liquidity risk [22,3], optimal control of exchange rates [17,26,5], and finally real options [35,23].…”

Section: Dx(t) = µ(X(t))dt + σ(X(t))dw (T) +mentioning

confidence: 99%

Smooth Fit Principle for Impulse Control of Multidimensional Diffusion Processes

Guo¹,

Wu²

2009

SIAM J. Control Optim.

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Section: Dx(t) = µ(X(t))dt + σ(X(t))dw (T) +mentioning

confidence: 99%

Smooth Fit Principle for Impulse Control of Multidimensional Diffusion Processes

Guo¹,

Wu²

2009

SIAM J. Control Optim.

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“…Most studies of this nature aim at designing a one-dimensional model for stochastic impulse control. Mundaca and Oksendal (1998) came up with the optimal control model of the exchange rate under uncertainty. On the other hand, Cadenillas and Zapatero (1999) designed the optimal foreign exchange control model based on the supposition of exchange rate target zones.…”

Section: Literature Reviewmentioning

confidence: 99%

Optimal Central Bank Intervention in the Foreign Exchange Market of Iran

Hajar¹

2015

IJEF

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The article pioneers the designing of a theoretical model for the optimal foreign exchange intervention in Iran. The model used is a nonlinear dynamic programming model with stochastic continuous functions to solve which the Uhlig program has been used. The results indicate that determining the best volume of intervention depends on the economic objectives of policymakers, the exchange rate of the present time, and the future exchange rate expected by the monetary authorities. Due to the monopolistic condition of the government in the foreign exchange market, the volume of the foreign exchange intervention in the market depends on the level the government is trying to keep the exchange rate at the present time as well as the next period. The exchange rate in Iran is not solely determined on the basis of the market mechanisms; therefore, the determinant of the volume of intervention by the monetary authority at the present time is the level that the government attempts to keep the exchange rate at present and in the future. The present and future levels of the exchange rate depend on the government budget expenditures. This in turn depends on the government size and its reliance on foreign exchange revenues received from the sale of oil.

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“…Most empirical results are controversial, leaving many questions unanswered, such as the issues of the optimal monetary policy and the optimal width of the currency band (if adopted). Improvements of Krugman's framework are obtained thank to the extensions of the basic model (amongst others [5,11,12,14,15,20]. Jeanblanc-Picque´ [12] applies impulse control methods to show that using a diffusion process with constant coefficients, it is possible to keep the exchange rate in a given target zone with discrete interventions.…”

Section: Introductionmentioning

confidence: 99%

“…Miller et al [14] find a subgame-perfect solution for a central bank aiming at stabilizing the exchange rate in a target zone, given proportional costs of intervention. Mundaca and Oksendal [15], using a jump diffusion process for the exchange rate dynamics, combine continuous and impulse controls to stabilize the exchange rate. Im [11] presents the central bank optimal intervention strategies to find the policy which minimizes the value of the loss function.…”

Section: Introductionmentioning

confidence: 99%

A disutility-based drift control for exchange rates

2012

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In this paper we propose an exchange rate model as solution of a disutility based drift control problem. Given the exchange rate is a function of the fundamental, we assume Government Authorities control the fundamental dynamics aimed at minimizing the discounted expected disutility caused by the distance between the fundamental and some specific target. The theoretical model is solved using the dynamic programming approach and introducing the concept of viscosity solution. We contribute to research on exchange rate control policies by deriving the optimal interventions aimed at stabilizing the exchange rate and preserving macroeconomic stability. We also show that, under particular conditions, it is possible to derive the optimal width of the currency band

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Optimal stochastic intervention control with application to the exchange rate

Cited by 89 publications

References 7 publications

Smooth Fit Principle for Impulse Control of Multidimensional Diffusion Processes

Smooth Fit Principle for Impulse Control of Multidimensional Diffusion Processes

Optimal Central Bank Intervention in the Foreign Exchange Market of Iran

A disutility-based drift control for exchange rates

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