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An Intraday Analysis of the Effectiveness of Foreign Exchange Intervention

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  • Neil, Beattie
  • Fillion, Jean-François
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    Abstract

    This paper assesses the effectiveness of Canada's official foreign exchange intervention in moderating intraday volatility of the Can$/US$ exchange rate, using a 2-1/2-year sample of 10-minute exchange rate data. The use of high frequency data (higher than daily frequency) should help in assessing the impact of intervention since the foreign exchange market is efficient and reacts rapidly to new information. The estimated equations explain volatility in terms of four major factors: intraday seasonal pattern; daily volatility persistence; macroeconomic news announcements; and the impact of central bank intervention. Rule-based (or expected) intervention apparently had no direct impact on the reduction of foreign exchange volatility, although the existence of a non-intervention band seemed to provide a small stabilizing influence. This result is interpreted to mean that the stabilizing effect of expected intervention came into play as the Canadian dollar approached the upper or lower limits of the band. When the dollar exceeded the band, actual intervention did not have any direct impact because it was expected. Moreover, the results show that discretionary (or unexpected) intervention might have been effective in stabilizing the Canadian dollar, although the impact of an intervention sequence diminished as it increased beyond a few days.

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/05/wp99-4.pdf
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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 99-4.

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    Length: 43 pages
    Date of creation: 1999
    Date of revision:
    Handle: RePEc:bca:bocawp:99-4

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    Related research

    Keywords: Exchange rates; Financial markets;

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    References

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    2. Ederington, Louis H & Lee, Jae Ha, 1993. " How Markets Process Information: News Releases and Volatility," Journal of Finance, American Finance Association, vol. 48(4), pages 1161-91, September.
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    22. Peiers, Bettina, 1997. " Informed Traders, Intervention, and Price Leadership: A Deeper View of the Microstructure of the Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 52(4), pages 1589-1614, September.
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    Citations

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    Cited by:
    1. Kathryn M. E. Dominguez & Freyan Panthaki, 2007. "The Influence of Actual and Unrequited Interventions," Working Papers 561, Research Seminar in International Economics, University of Michigan.
    2. Dominguez, Kathryn M.E., 2006. "When do central bank interventions influence intra-daily and longer-term exchange rate movements?," Journal of International Money and Finance, Elsevier, vol. 25(7), pages 1051-1071, November.
    3. Christopher J. Neely, 2005. "An analysis of recent studies of the effect of foreign exchange intervention," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 685-718.
    4. Michael R. King & Rasmus Fatum, 2005. "The Effectiveness of Official Foreign Exchange Intervention in a Small Open Economy: The Case of the Canadian Dollar," Working Papers 05-21, Bank of Canada.
    5. Jeff M. Rogers & Pierre Siklos, 2001. "Foreign Exchange Market Intervention in Two Small Open Economies: The Canadian and Australian Experience," Research Paper Series 57, Quantitative Finance Research Centre, University of Technology, Sydney.
    6. Richard T. Baillie & Owen F. Humpage & William P. Osterberg, 1999. "Intervention as information: a survey," Working Paper 9918, Federal Reserve Bank of Cleveland.
    7. Christopher J. Neely, 2002. "The temporal pattern of trading rule returns and central bank intervention: intervention does not generate technical trading rule profits," Working Papers 2000-018, Federal Reserve Bank of St. Louis.
    8. Chris D'Souza, 2002. "A Market Microstructure Analysis of Foreign Exchange Intervention in Canada," Working Papers 02-16, Bank of Canada.
    9. Siklos, Pierre L., 2000. "Monetary policy transparency, public commentary, and market perceptions about monetary policy in Canada," Discussion Paper Series 1: Economic Studies 2000,08, Deutsche Bundesbank, Research Centre.

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