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Constant elasticity of variance models with target zones

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  • Feng, Liming
  • Jiang, Pingping
  • Wang, Yongjin

Abstract

In this paper, we study a reflected constant elasticity of variance (RCEV) process with two-sided reflecting barriers for modeling the dynamics of a foreign exchange rate in a target zone. We derive a closed form expression for the transition density by using the spectral expansion method. Monte Carlo simulation shows that our method is accurate and efficient when the results are applied to compute the expected value of the process. Finally, we illustrate that ignoring target zones in the CEV model may lead to significant computational errors.

Suggested Citation

  • Feng, Liming & Jiang, Pingping & Wang, Yongjin, 2020. "Constant elasticity of variance models with target zones," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 537(C).
    • Handle: RePEc:eee:phsmap:v:537:y:2020:i:c:s0378437119315390
    DOI: 10.1016/j.physa.2019.122702
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    References listed on IDEAS

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