Trigger Strategies and Price Dynamics in Equity and Foreign Exchange Markets / Paul R. Krugman.

Format:

Book

Author/Creator:

Krugman, Paul R.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w2459.

NBER working paper series no. w2459

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1987.

Summary:

Trigger strategist-s may be defined as act-ors in asset markets who buy or sell when the price reaches a predetermined level ; t-hey include participants in portfolio insurance schemes in equity markets and central banks who intervene to defend an exchange rate target zone. This paper presents an approach to modeling the effects of trigger strategists, with emphasis on how target zones affect market expectations. It is shown that a commitment to defend a target zone will generate stabilizing expectations within the band, which may generate a "target zone honeymoon" . an extended period in which the announcement of a target. zone stabilizes exchange rates without any need for action on the part of authorities. However, an imperfectly credible target zone is vulnerable to crises in which the market tests the authorities' resolve.

Notes:

Print version record

December 1987.