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Signaling Effects of Foreign Exchange Interventions and Expectation Heterogeneity among Traders

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  • Iwatsubo, Kentaro
  • Shimizu, Junko

Abstract

This paper explores whether official intervention signaling effects on short-run exchange rate movements depend on market conditions. We find evidence that announced interventions significantly affect the level and reduce the volatility of the yen/dollar rate when traders' expectations of future exchange rates are relatively heterogeneous. To compensate for the lack of daily exchange rate expectation survey data, we use implied volatility as a proxy since these are highly correlated. These results are consistent with predictions from the market microstructure models with asymmetric information across agents and the signaling hypothesis of foreign exchange interventions. Our findings indicate that the efficacy of intervention hinges not only on the firmness of signals but also on the degree of expectation heterogeneity among traders.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/13502/1/wp2005-18a.pdf
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Bibliographic Info

Paper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2005-18.

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Length: 35 p.
Date of creation: Mar 2006
Date of revision:
Handle: RePEc:hit:hitcei:2005-18

Note: First draft: August 18, 2004; This version: October 27, 2005
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Related research

Keywords: Foreign exchange intervention; Announcements; Expectation heterogeneity;

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  1. Yin-Wong Cheung & Menzie D. Chinn, 2000. "Currency Traders and Exchange Rate Dynamics: A Survey of the U.S. Market," CESifo Working Paper Series 251, CESifo Group Munich.
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