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Do options-implied RND functions on G3 currencies move around the times of interventions on the JPY/USD exchange rate?

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    Abstract

    This paper focuses on changes in the currency options market’s assessment of likely future exchange rate developments around the times of official interventions in the JPY/USD exchange rate. We estimate the options-implied risk-neutral density functions (RNDs) using daily OTC quotes for options prices with fixed moneyness that avoids the biases that typically characterise the exchange traded price quotes. We find that the episodes of interventions on the JPY/USD exchange rate coincide with systematic changes in all moments of the estimated RNDs on the JPY/USD currency pair, and in several of the moments of the estimated RNDs on the JPY/EUR and USD/EUR currency pairs. In particular, the operations where Japanese yen is sold coincide with a movement in the mean of the RND towards a weaker yen both against the US dollar and the euro, as well as with an increase in implied standard deviations. Prior to the interventions, the RNDs tend to move into opposite direction suggesting, on the average, increasingly unfavourable market conditions and leaning-against-the wind by the Japanese authorities.

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    File URL: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp410.pdf
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    Bibliographic Info

    Paper provided by European Central Bank in its series Working Paper Series with number 410.

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    Length: 63 pages
    Date of creation: Nov 2004
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    Handle: RePEc:ecb:ecbwps:20040410

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    Related research

    Keywords: Foreign exchange market intervention; option-implied distributions; GARCH estimation.;

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    1. Martin D. D. Evans and Richard K. Lyons., 1999. "Order Flow and Exchange Rate Dynamics," Research Program in Finance Working Papers RPF-288, University of California at Berkeley.
    2. Melick, William R. & Thomas, Charles P., 1997. "Recovering an Asset's Implied PDF from Option Prices: An Application to Crude Oil during the Gulf Crisis," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(01), pages 91-115, March.
    3. Michael Ehrmann & Marcel Fratzscher, 2004. "Exchange rates and fundamentals - new evidence from real-time data," Working Paper Series 365, European Central Bank.
    4. Kaminsky, Graciela L. & Lewis, Karen K., 1996. "Does foreign exchange intervention signal future monetary policy?," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 285-312, April.
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    Cited by:
    1. Nikkinen, Jussi & Vähämaa, Sami, 2009. "Central bank interventions and implied exchange rate correlations," Journal of Empirical Finance, Elsevier, vol. 16(5), pages 862-873, December.
    2. 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.

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