A Non-parametric reassessment of target zone nonlinearities: The Spanish Peseta/Deutsche Mark exchange rate

Abstract

In this paper we present evidence concerning the existence of target zone nonlinearities in the Spanish Peseta/Deutsche Mark exchange rate using data with daily frequency for the period 1989-1996. Using a non-parametric technique, the Alternation Conditional Expectations (ACE) algorithm, we obtain evidence of the existence of non-linearities in both exchange rate and interest rate differential, with a functional form close to the non-linear effects given by the target zone model with realignment risk.Target zones, exchange rate, realignment risk, ACE algorithm