Before revision: We develop a target zone model with realistic features such as finite exit time , non-stationary dynamics and heavy tails. Our rigorous characterization of risk corresponds to the dynamic counterpart of a mean-preserving spread.
After revision: We develop a target zone model with realistic features such as finite exit time and non-Gaussian tails. We show how the tails are a consequence of time-varying investor risk aversion, which generates mean-preserving spread.