Price dynamics under stochastic process switching: some extensions and an application to EMU

Dewachter, Hans; Veestraeten, Dirk

doi:10.1016/s0261-5606(99)00001-7

Cited by 17 publications

(20 citation statements)

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“…the policy option that was suggested by several authors to increase intervention activities in order to achieve stabilization of the exchange rates on the road to Stage III of the European Monetary Union (EMU) (Begg et al, 1997;De Grauwe, 1996a,b;De Grauwe and Spaventa, 1997;Obstfeld, 1998;De Grauwe et al, 1999). This analysis deals with the issue of price dynamics of an asset, here the exchange rate, which is known to be converted into another asset at a specified date and ceases to exist.…”

Section: Introductionmentioning

confidence: 99%

“…Recently Wilfling (2009) examined volatility regime-switching in European exchange rates prior to EMU focusing on the intermediate period which is the one during which changes in volatility are observed, is the period between the date-of-first-notice and the date-of-full acceptance is of crucial importance to understanding the exchange rate dynamics. Finally, De Grauwe et al (1999) and Wilfling (2009) among others argued that this framework of analysis can also be used for future accession countries as well as for the adoption of a currency board. This latter argument could provide further justification for the need to study the exchange rate behaviour of the CEE economies.…”

Section: Introductionmentioning

confidence: 99%

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Markov-switching regimes and the monetary model of exchange rate determination: Evidence from the Central and Eastern European markets

Syllignakis

Κουρέτας

2011

Journal of International Financial Markets, Institutions and Mo

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Markov-switching regimes and the monetary model of exchange rate determination: Evidence from the Central and Eastern European markets

Syllignakis

Κουρέτας

2011

Journal of International Financial Markets, Institutions and Mo

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“…However, both papers do not elaborate the impact of changes in the takeover probability on target stock-price dynamics. By contrast, De Grauwe et al (1999) and Wilfling and Maennig (2001) discuss a closely related problem. They analyze exchange-rate dynamics among those countries which participated in the first wave of the European Monetary Union (EMU).…”

Section: Datamentioning

confidence: 99%

Markov-switching in target stocks during takeover bids

Gelman

Wilfling

2009

Journal of Empirical Finance

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“…We therefore calculate asymptotic standard errors for four parameters whilst keeping α at its estimated value. However, model specification and especially the significance of α will be formally tested via Likelihood Ratio 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 F o r P e e r R e v i e w Dewachter and Veestraeten (1999) argued that the start of EMU on 1 January 1999 had to be seen as a regime switch that already more than one year earlier drastically altered exchange rate dynamics. Table 2.…”

Section: Submitted Manuscriptmentioning

confidence: 99%

The presence of target zone nonlinearities when narrower bands exist within official zones

Veestraeten

2007

Applied Economics

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The presence of target zone nonlinearities is generally refuted in empirical research. We argue that this may be due to estimation being performed vis-à-vis official limits when monetary authorities in fact are targeting a narrower band. Estimation results for the Belgian and French franc confirm that nonlinearities are present when narrower zones are accounted for.Keywords: Brownian motion, conditional probability density function, exchange rates, nonlinearities, target zones.JEL classification: F31, F33. * University of Amsterdam, Department of Economics, Roetersstraat 11, 1018 WB Amsterdam, the Netherlands. Tel.: +31-20-5254194, fax: +31-20-5254254, e-mail: Dirk.Veestraeten@uva.nl. I am indebted to Roel Beetsma, Giuseppe Cavaliere, Paul De Grauwe, Casper de Vries, Hans Dewachter, Henk Jager, Eiko Kenjoh, Franc Klaassen, Piet Sercu, Marno Verbeek and Koen Vermeylen for stimulating discussions. Of course, the usual disclaimer applies. 1 Page 1 of 22Editorial Office, Dept of Economics, Warwick University, Coventry CV4 7AL, UK 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 F o r P e e r R e v i e w Submitted Manuscript IntroductionEmpirical research on nonlinearities and implicit bands in exchange rate target zones has largely evolved independently. The literature on nonlinearities in the relationship between fundamentals and exchange rates found only sparse evidence of departures from linearity (see, for instance, Flood, Rose and Mathieson, 1991;de Jong, 1994;Lindberg and Söderlind, 1994;Garratt, Psaradakis and Sola, 2001). On the other hand, the empirical literature recorded strong evidence of narrower or implicit zones within official limits in the Exchange Rate Mechanism (see, amongst others, Bartolini and Prati, 1999;Anthony and MacDonald, 1999;Chung and Tauchen, 2001). However, connecting these two distinct lines of the literature could be a worthwhile exercise since the presence of narrower zones implies that expectation formation is to be evaluated with respect to these actual limits rather than vis-à-vis the wider, officially announced zone. This is of the utmost importance for the search for target zone nonlinearities since they are likely to be overlooked when inspection is performed with respect to limits that are too wide. Indeed, the Krugman (1991) model shows that nonlinearities primarily are to be found near the limits. Using official limits in estimation when actually a narrower zone is in place will therefore tend to underestimate nonlinearities. This paper estimates the Krugman (1991) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 F o r P e e r R e v i e w 2 The target zone model of Krugman (1991) The model of Kru...

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Price dynamics under stochastic process switching: some extensions and an application to EMU

Cited by 17 publications

References 10 publications

Markov-switching regimes and the monetary model of exchange rate determination: Evidence from the Central and Eastern European markets

Markov-switching regimes and the monetary model of exchange rate determination: Evidence from the Central and Eastern European markets

Markov-switching in target stocks during takeover bids

The presence of target zone nonlinearities when narrower bands exist within official zones

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