The Impact of Central Bank FX Interventions on Currency Components (original) (raw)
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Size matters: Central bank interventions on the yen/dollar exchange rate
2006
This paper explores the effects of the recent interventions of the Bank of Japan on the level and volatility of the yen/dollar exchange rate. A special attention is devoted to the prominent features affecting the signal conveyed by these interventions. The results show a clear duality: small unilateral interventions are counterproductive while large and isolated ones influence the FX market in the desired directions. It is also found that the perverse effect is avoided through coordinated operations.
Review of Financial Economics, 2004
During the past 30 years, central banks have often intervened in foreign exchange markets, and the magnitude of their foreign exchange market interventions has varied widely. We develop a quantitative reaction function model that renders it possible to examine the determinants of ''small'' and ''large'' interventions. We apply the model to analyzing the intervention policy of the Japanese monetary authorities (JMA) in the yen/U.S. dollar market during the period from 1991 through 2001. To this end, we use recently released official data on the foreign exchange market interventions of the JMA. We find that the JMA tended to conduct large interventions when the yen/U.S. dollar exchange rate drifted away from an ''implicit target exchange rate.''
The Quarterly Review of Economics and Finance, 2005
This paper uses recently released official data on the foreign exchange market interventions of the Japanese monetary authorities in the yen/U.S. dollar market during the period 1991-2001 to examine the motivation for the intervention policy. We also compare the Japanese intervention policy with the U.S. intervention policy. Our results suggest that the Japanese authorities regularly responded to deviations of the yen/U.S. dollar exchange rate from a short-term and a long-term exchange rate target. By contrast, the U.S. authorities intervened only occasionally and seemed to have merely reinforced Japanese interventions.
Foreign-exchange intervention strategies and market expectations: insights from Japan
Journal of International Financial Markets, Institutions and Money, 2009
This study extends the traditional set of central bank's interventions to include official announcements in order to provide empirical evidence on two pivotal questions: (i) are FX authorities able to influence market expectations with different instruments? (ii) how should interventions be designed to have the greatest impact? Using Japanese data over 1992-2004 and an event-study approach, we estimate the effect of different strategies on the USD/JPY exchange-rate risk-neutral density. Overall, transparent policies (public and oral interventions) appear to be the most effective. Moreover, the effect is greater when policies involve a financial cost (risk) suggesting that simple announcements can only be deemed as an imperfect substitute for actual interventions.
The Effectiveness of Foreign Exchange Market Intervention: A Review of Post-2001 Studies on Japan
Journal of Reviews on Global Economics, 2014
Post-2001 studies on Japanese official intervention, though divergent in results, generally support the effectiveness of daily intervention in influencing yen-dollar exchange rate returns. Studies are less conclusive about the impact on volatility. Any impact of intervention appears to be short-lived and a reversal of the initial impact to occur on subsequent days, suggesting market microstructure as the primary channel: intervention acts like any other information and works through order flows. The overriding message of the literature is that the impact of intervention depends on the conditions under which it takes place. Each intervention is thus a unique event. This explains why econometric tests of the average impact of intervention yield mixed results.
Social Science Research Network, 2005
The purpose of this paper is to analyze the impact of the Bank of Japan's official interventions on the JPY/USD parity during the period 1992-2003. The novelty of our approach is to combine two recent advances of the empirical literature on foreign exchange interventions: (i) drawing on overthe-counter option prices to characterize more precisely the distribution of market expectations; (ii) redefining interventions in terms of events as they tend to come in clusters. Moreover, in order to deal with the features of the data (small sample size, non-standard distribution), we use bootstrap tests. We show that interventions have a significant impact on the mean expectation (the forward rate). The results are more ambiguous for variance. Additionally, we find that the effect of interventions on skewness is significant, robust to different definitions of skewness, and consistent with the direction of interventions. On the contrary, our results clearly show that kurtosis is not affected by interventions. We finally show that: (i) coordination increases effectiveness of interventions; (ii) results are not altered when controlling for other economic and political news.
Journal of Empirical Finance, 2008
The purpose of this paper is to analyze the impact of the Bank of Japan's official interventions on the JPY/USD parity during the period 1992-2003. The novelty of our approach is to combine two recent advances of the empirical literature on foreign exchange interventions: (i) drawing on overthe-counter option prices to characterize more precisely the distribution of market expectations; (ii) redefining interventions in terms of events as they tend to come in clusters. Moreover, in order to deal with the features of the data (small sample size, non-standard distribution), we use bootstrap tests. We show that interventions have a significant impact on the mean expectation (the forward rate). The results are more ambiguous for variance. Additionally, we find that the effect of interventions on skewness is significant, robust to different definitions of skewness, and consistent with the direction of interventions. On the contrary, our results clearly show that kurtosis is not affected by interventions. We finally show that: (i) coordination increases effectiveness of interventions; (ii) results are not altered when controlling for other economic and political news.
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.
2010
This paper assesses the impact of official central bank interventions (CBIs) on exchange rate returns, their volatility and bilateral correlations. By exploiting the publication of intervention data by the Bank of England, this study is able to investigate official interventions by a total number of four central banks, while the previous studies have been limited to three banks, namely the Federal Reserve, Bundesbank and Bank of Japan. The results of the existing literature are reappraised and refined. In particular, unilateral CBIs are found to be more successful than coordinated ones. The likely implications of these findings are then discussed.