Quantitative Modelling of the EUR/CHF Exchange Rate During the Target Zone Regime of September 2011 to January 2015: A Correction

Abstract

Lera and Sornette (2016) derive an analytical expression for the conditional volatility of the (unobservable) economic fundamental in Krugman (1991)'s target zone model by locally inverting the relation between the exchange rate and its fundamental value, such that it can be modelled as a function of observable variables only. They use this Expression to empirically analyze the suitability of the Krugman model in describing the EUR-CHF minimum exchange rate regime that the Swiss National Bank implemented from September 6, 2011 to January 15, 2015. This expression, however, contains an error in Equation (3.6), where the scalar 2 should be raised to the power of 3/4 instead of being raised to the power of 1/4. Similarly, in the empirical analysis (the absolute value of) the semi-elasticity of money demand in Equation (4.19) is in an incorrect time unit. This note corrects the two errors.