In this paper, we model the exchange rate in a target zone by a so-called reflected Ornstein-Uhlenbeck process. A simulation-based maximum likelihood estimation strategy of the parameters involved in the model is proposed and studied. The model fits data on exchange rates in the European...

We propose a tractable model for the exchange rate in a target zone with realignment. The target zone exchange rate dynamics is assumed to obey a bounded regular diffusion with two-sided unattainable barriers. The realignment is modeled as a continuous-time two-state Markov chain. Under the...