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The Impact of the Japanese Banking Crisis on the Intraday FX Market

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  • Yuko Hashimoto
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    Abstract

    Using the tick-by-tick yen/dollar exchange rate, this paper examines the effect of Japanese banking crisis in late 1997 on the foreign exchange market. By high-frequency methodology, GARCH estimation and variance-ratio tests, the existence of a structural break in the foreign exchange market at the onset of the crisis is detected. We show a reversed pattern in return volatility after the series of bankruptcies. From the microstructure analysis, it is found that the change in exchange rate dynamics can be attributed to a change in strategic foreign exchange trade behavior. The result provides new insights into the trading activities of market makers at the onset of bank failures

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    File URL: http://repec.org/esFEAM04/up.12209.1080702236.pdf
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    Bibliographic Info

    Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 679.

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    Date of creation: 11 Aug 2004
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    Handle: RePEc:ecm:feam04:679

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    Keywords: Intraday exchange rate; Banking crisis; GARCH; microstructure;

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    1. Rabemananjara, R & Zakoian, J M, 1993. "Threshold Arch Models and Asymmetries in Volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(1), pages 31-49, Jan.-Marc.
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    3. Thomas F. Cargill & Michael M. Hutchison & Takatoshi Ito, 2001. "Financial Policy and Central Banking in Japan," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032856, January.
    4. Jones, Charles M & Kaul, Gautam & Lipson, Marc L, 1994. "Transactions, Volume, and Volatility," Review of Financial Studies, Society for Financial Studies, vol. 7(4), pages 631-51.
    5. Takatoshi Ito Richard K. Lyons and Michael T. Melvin., 1997. "Is There Private Information in the FX Market? The Tokyo Experiment," Research Program in Finance Working Papers RPF-270, University of California at Berkeley.
    6. Baillie, Richard T & Bollerslev, Tim, 1991. "Intra-day and Inter-market Volatility in Foreign Exchange Rates," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 565-85, May.
    7. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, vol. 31(3), pages 307-327, April.
    8. 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.
    9. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
    10. Richard K. Lyons, 2006. "The Microstructure Approach to Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 026262205x, January.
    11. Takeo Hoshi & Anil Kashyap, 2000. "The Japanese Banking Crisis: Where Did It Come From and How Will It End?," NBER Chapters, in: NBER Macroeconomics Annual 1999, Volume 14, pages 129-212 National Bureau of Economic Research, Inc.
    12. Bollerslev, Tim & Domowitz, Ian, 1993. " Trading Patterns and Prices in the Interbank Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 48(4), pages 1421-43, September.
    13. Goodhart, C A E, et al, 1993. "New Effects in a High-Frequency Model of the Sterling-Dollar Exchange Rate," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(1), pages 1-13, Jan.-Marc.
    14. Thomas F. Cargill & Michael M. Hutchison & Takatoshi Ito, 1997. "The Political Economy of Japanese Monetary Policy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262032473, January.
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