VARIABLE PROBABILITY OF REALIGNMENT IN A TARGET ZONE

The target zone model presented here encompasses a realignment probability which increases as the fundamental deviates from the centre of the zone. The analysis is carried out for cases where the fundamental follows either a Brownian motion or an Ornstein-Uhlenbeck process. The simplest version of the model yields tractable results, which prove to be robust when its most restrictive assumption is relaxed. The solution obtained is dubbed the steeper S, in accordance with its most relevant feature.