Constant elasticity of variance models with target zones

Liming Feng, Pingping Jiang, Yongjin Wang

Research output: Contribution to journalArticle

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.

Original languageEnglish (US)
Article number122702
JournalPhysica A: Statistical Mechanics and its Applications
Volume537
DOIs
StatePublished - Jan 1 2020

Keywords

  • Reflected CEV process
  • Spectral expansion
  • Target zone
  • Transition density
  • Whittaker function

ASJC Scopus subject areas

  • Statistics and Probability
  • Condensed Matter Physics

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