CEU Electronic Theses and Dissertations, 2009
| Author | Naszodi, Anna |
|---|---|
| Title | EXCHANGE RATES, REGIME SWITCHES AND CURRENCY OPTIONS |
| Summary | Title of Chapter 1: Exchange Rate Dynamics Under State-Contingent Stochastic Process Switching: An Application to the EMU Entry of New EU Members Abstract: This paper gives a closed-form solution of a process switching problem, i.e., the adoption of Euro. Preceding the regime switch, the exchange rate is derived as a function of the following factors: fundamental, market expectations for both the Euro locking rate, and date. Similarly, the exchange rate volatility is a function of the covariances of these factors. The model is applied to examine how the prospect of locking influences the exchange rate volatility in three EMU candidate countries. The stabilizing effect, estimated from currency option prices, is found to be substantial despite of the highly uncertain locking date and rate. JEL: F31, F36, G13. Keywords: Stochastic process switching, Eurozone entry, exchange rate stabilization, asset-pricing exchange rate model. % ;%%&# x25;%% ;%%&# x25;%% ;%%&# x25;%% ;%%&# x25;%% ;%%&# x25;%% ;%%&# x25;%% ;%%&# x25;%% ;%%&# x25;%% ;%%&# x25; Title of Chapter 2: Filtering the Market Expectation for the Euro Locking Rate in the Extended Asset-Pricing Exchange Rate Model Abstract: This paper investigates the market expectation for the Euro locking rate in a regime switching model. This regime switch is the locking of the exchange rates of the EMU candidate countries at the final conversion rate. First, the process of the exchange rate is derived in the extended asset-pricing exchange rate model as a function of the processes of three factors, the latent exchange rate and the market expectation for the Euro locking rate and date. Then, the model is applied to analyze the exchange rates of the Czech Koruna, the Hungarian Forint, and the Polish Zloty versus the Euro in the period between January 4, 2005, and March 6, 2007. The latent exchange rate, the expected locking rate and date are filtered from the historical exchange rate, interest rate and currency option data. The expected locking rate is found to be an important component of the exchange rate. JEL: F31, F36, G13. Keywords: Eurozone entry, asset-pricing exchange rate model, stochastic process switching, factor model, Kalman filter. 5;%%& #x25;% 5;%%& #x25;% 5;%%& #x25;% 5;%%& #x25;% 5;%%& #x25;% 5;%%& #x25;% 5;%%& #x25;% 5;%%& #x25;% 5;%%& #x25; Title of Chapter 3: Target Zone Realignments and Exchange Rate Behavior in an Options-Based Model Abstract: This paper develops an options-based model of target zone arrangements. The exchange rate in a target zone system is modeled as a fundamental term adjusted by the price of two options. The paper provides an accurate description of the options, which can capture the joint effect of the edges of the band. The model can be applied for a wide range of processes of the fundamental. The model is used to decompose exchange rate changes after band realignment into the direct effect of realignment, changing expectations and changing uncertainty. It is applied to realignments of France, Hungary and Portugal prior to their EMU entry. JEL: F31, F33, G12, C63. Keywords: target zone system, options, target zone realignment, EMU entry, EMS. |
| Supervisor | Laszlo Matyas |
| Department | Economics PhD |
| Full text | https://www.etd.ceu.edu/2009/naszodia.pdf |
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