The Effectiveness of Foreign Exchange Intervention in Australia: A Factor Model Approach with GARCH Specifications
AbstractThis paper analyses the effectiveness of foreign exchange intervention by the Reserve Bank of Australia (RBA). Initially, a latent factor model is used to decompose the volatility of exchange rates into three unobserved factors - world, numeraire and idiosyncratic. Subsequently, the impact of foreign exchange rate intervention is examined by further decomposing the numeraire (Australian) factor into an intervention component and an unobserved component. An indirect estimation approach is employed to facilitate the imposition of GARCH structures on some of the unobserved factors. The empirical results suggest that less than three percent of observed exchange rate volatility is explained by RBA intervention.
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Bibliographic InfoPaper provided by School of Economics and Finance, Queensland University of Technology in its series School of Economics and Finance Discussion Papers and Working Papers Series with number 135.
Date of creation: 20 Jan 2003
Date of revision:
exchange rate; latent factor model; indirect estimation;
Find related papers by JEL classification:
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- F31 - International Economics - - International Finance - - - Foreign Exchange
- G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
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