Volatility expectations and asymmetric effects of direct interventions in the FX market (original) (raw)
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European Economic Review, 2003
In this paper, we investigate the effect of central bank interventions on the weekly returns and volatility of the DEM/USD and YEN/USD exchange rate returns. In contrast with previous analyzes, we allow for regime-dependent specifications and investigate whether official interventions can explain the observed volatility regime switches. It is found that, depending on the prevailing volatility level, coordinated central bank interventions can lead to either a stabilizing or a destabilizing effect. Our results lead us to challenge the usual view that such interventions always imply increases in volatility. JEL Classifications: C22, E44, F31, G15.
Endogenous and Exogenous Volatility in the Foreign Exchange Market
We identify two sources of heteroskedasticity in high-frequency financial data. The first source is the endogenous changing participation of heterogeneous speculators to the market, coupled with the time varying behavior of the market maker. The second source is the exogenous flow of market relevant information. We model the first one by means of a Markov switching (MS) SVAR process, and the second one by means of a GARCH process for the MS-SVAR structural errors. Using transaction data of the EUR/USD market in 2016, we detect three regimes characterized by different levels of endogenous volatility. The impact of structural shocks on the market depends on both sources, but the exogenous information is channeled to the market mostly through price. This suggests that the market maker is better informed than the speculators, who act as momentum traders. The latter are able to profit from trade because, unlike noise traders, they respond immediately to price shocks.
Bank of Japan Interventions and the Volatility of the Dollar/Yen Exchange Rate
Credit and capital markets, 2017
We analyse the impact of Bank of Japan's (BoJ) intervention on the volatility of the USD / JPY exchange rates under a regime switching framework. We find that the Yen intervention decreases the volatility, and the impact is only significant when market volatility is low. Die Interventionen der japanischen Zentralbank und die Volatilität des Dollar / Yen-Wechselkurses Zusammenfassung Der Beitrag analysiert den Effekt von Interventionen der japanischen Notenbank (BoJ) auf die Volatilität des USD / JPY-Wechselkurses im Rahmen eines Regime-Switching Modells. Die Ergebnisse zeigen, dass Interventionen die Volatilität senken. Allerdings ist der Effekt nur dann signifikant, wenn die Marktvolatilität niedrig ist.
Asia-Pacific Financial Markets, 2016
Econometric evidence on why central banks intervene in the foreign exchange market and the impact of such intervention has remained inconclusive. We contribute to the literature with evidence from India, a managed float regime that sees consistent monitoring and intervention by Reserve Bank of India, India's central bank. Estimation of the central bank reaction function shows that increased volatility in the foreign exchange market and misalignment from targeted rates are important objectives behind intervention. The paper further uses the GARCH framework to study how intervention influences exchange rate volatility. We find that intervention in the spot market increases volatility while that in the forward market reduces volatility.
Central bank intervention and exchange rate volatility, its continuous and jump components
International Journal of Finance & Economics, 2007
We analyze the relationship between interventions and volatility at daily and intra-daily frequencies for the two major exchange rate markets. Using recent econometric methods to estimate realized volatility, we employ bipower variation to decompose this volatility into a continuously varying and jump component. Analysis of the timing and direction of jumps and interventions imply that coordinated interventions tend to cause few, but large jumps. Most coordinated operations explain, statistically, an increase in the persistent (continuous) part of exchange rate volatility. This correlation is even stronger on days with jumps.
Impact of Reserve Option Mechanism on Exchange Rate Volatility During the FED’s Tapering Period
Journal of Central Banking Theory and Practice
This study investigates the effectiveness of ROM. We conducted the GARCH (1,1) Model to determine whether ROM contributed to decreasing the volatility of USD/TL exchange rate for the period 2013-2014. We construct four Models where four different variables are separately used that represent the ROM tool, i.e. the amount of FX reserves of CBRT via ROM, and the share of the FX reserves via ROM in Gross FX Reserves of CBRT. Our findings are convincing to say FX facility and the ratio of utilization for the FX facility to ensure the results are statistically meaningful during this period.
Foreign exchange market intervention and expectations: The yen/dollar exchange rate
Journal of International Money and Finance, 2005
We use official intervention data provided by the Federal Reserve and, recently, the Japanese Ministry of Finance, as well as a new data set based on Reuters news articles on intervention that is perceived by FX traders. We estimate probability density functions (PDFs) from option data to describe market expectations. We find that, between 1993 and 1996, Japanese authorities tended to respond mainly to deviations of the exchange rate from some implicit target levels and to a rise in market uncertainty. Between 1997 and 2000, the Bank of Japan mainly reacted in response to higher uncertainty. On the other hand, the Federal Reserve intervened only in cooperation with the Bank of Japan. We find that intervention had no statistically significant systematic effect on the mean of yen/dollar expectations. Consistently, we detect no evidence that intervention systematically altered market participants' bias between a stronger and a weaker dollar with respect to the forward rate. Contrary to most findings of the literature, we fail to find evidence that intervention was associated on average with higher exchange rate variability. Finally, we find that intervention was not followed by an increase in the tails of the distribution of exchange rate expectations. The consensus view is that sterilized intervention can be effective if it is announced publicly, coordinated across central banks, and most importantly, consistent with underlying fiscal and monetary policies. As we are able to control for public announcement and central bank coordination, our findings suggest that intervention during our sample period was not consistent with underlying fiscal and monetary policy and therefore had little influence on market outcomes and expectations.
International Journal of …, 2007
A vast literature on the effects of sterilized intervention by the monetary authorities in the foreign exchange markets concludes that intervention systematically moves the spot exchange rate only if it is publicly announced, coordinated across countries, and consistent with the underlying stance of fiscal and monetary policy. Over the past 15 years, researchers have also attempted to determine if intervention has any effects on the dispersion and directionality of market views concerning the future exchange rate. These studies usually focus on the variance around the expected future exchange rate}the second moment. In this paper we demonstrate how to use over-the-counter option prices to recover the risk-neutral probability density function (PDF) for the future exchange rate. Using the yen/dollar exchange rate as an example, we calculate measures of dispersion and directionality, such as variance and skewness, from estimated PDFs to test whether intervention by the Japanese Ministry of Finance during the period 1996-2004 had any impact on the higher moments of the exchange rate. We find little or no systematic effect, consistent with the findings of the literature on the spot rate as: Japanese intervention was not publicly announced prior to August 2000, and since that time only publicly announced after the fact, over the past 10 years rarely coordinated across countries and, in hindsight, probably inconsistent with the underlying stance of monetary policy.