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Risk Premium and Central Bank Intervention

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  • Pinar Ozlu

Abstract

This study examines the relation between the risk premium and central bank intervention. Forward rates are calculated for the Turkish Lira-USD exchange market and then the effect of central bank intervention on the risk premium is estimated. Using high quality daily intervention data from the Central Bank of Turkey as well as implied forward rates, an MA (21)-GARCH (1,1) model is estimated. Both purchases and sales of US dollars by the Central Bank of Turkey appear to have no effect on the size of risk premium for TL/USD for the free float period. Similar results are found for the managed float period. Empirical support was weak for the theoretical model, with intervention having a significant effect on the risk premium.

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Bibliographic Info

Article provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its journal Central Bank Review.

Volume (Year): 6 (2006)
Issue (Month): 1 ()
Pages: 65-79

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Handle: RePEc:tcb:cebare:v:6:y:2006:i:1:p:65-79

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Keywords: Central Bank Intervention; Risk Premium;

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  1. Baillie, Richard T. & P. Osterberg, William, 1997. "Central bank intervention and risk in the forward market," Journal of International Economics, Elsevier, Elsevier, vol. 43(3-4), pages 483-497, November.
  2. Martin D.D. Evans & Karen K. Lewis, 1993. "Do Long-Term Swings in the Dollar Affect Estimates of the Risk Premia?," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 93-12, New York University, Leonard N. Stern School of Business, Department of Economics.
  3. Baillie, Richard T. & Humpage, Owen F. & Osterberg, William P., 2000. "Intervention from an information perspective," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 10(3-4), pages 407-421, December.
  4. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
  5. Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(5), pages 829-53, October.
  6. Baillie, R.T., 1988. "Econometric Tests Of Rationality And Market Efficiency," Papers, Michigan State - Econometrics and Economic Theory 8805, Michigan State - Econometrics and Economic Theory.
  7. Hakkio, Craig S, 1981. "Expectations and the Forward Exchange Rate," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 22(3), pages 663-78, October.
  8. Baillie, Richard T & Lippens, Robert E & McMahon, Patrick C, 1983. "Testing Rational Expectations and Efficiency in the Foreign Exchange Market," Econometrica, Econometric Society, Econometric Society, vol. 51(3), pages 553-63, May.
  9. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, American Economic Association, vol. 77(1), pages 133-53, March.
  10. Jeffrey A. Frankel & Kenneth A. Froot, 1985. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc.
  11. Lewis, Karen K., 1988. "Testing the portfolio balance model: A multi-lateral approach," Journal of International Economics, Elsevier, Elsevier, vol. 24(1-2), pages 109-127, February.
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