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Can Central Bank Interventions Affect the Exchange Rate Volatility? Multivariate GARCH Approach Using Constrained Nonlinear Programming

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  • Tolga Caskurlu
  • Mustafa C. Pinar
  • Aslihan Salih
  • Ferhan Salman

Abstract

This study examines the impact of foreign currency market interventions of the Central Bank of Turkey (CBT) in a multivariate GARCH framework. CBT has switched to the floating exchange rate regime since 2001 crisis and announced that the interventions in the foreign exchange markets are aimed at reducing the volatility of the USD/YTL and EUR/YTL. However the literature documents that, foreign exchange interventions lead to an increase in exchange rate volatility. In an attempt to calculate the volatility, we employ a bivariate GARCH estimation with non-linear constrained optimization (NLP) [22] and BEKK [3] on the USD/YTL and EUR/YTL. Our results shed some doubt about the efficiency of these interventions in stabilizing the Turkish Lira market.

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Paper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 0806.

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Date of creation: 2008
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Handle: RePEc:tcb:wpaper:0806

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Keywords: Time series econometrics; Constrained Nonlinear programming; Multivariate GARCH; FOREX Interventions.;

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  1. Bollerslev, Tim & Engle, Robert F & Wooldridge, Jeffrey M, 1988. "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 116-31, February.
  2. Michel Beine & Charles S. Bos & Sébastien Laurent, 2007. "The Impact of Central Bank FX Interventions on Currency Components," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 5(1), pages 154-183.
  3. Engle, Robert F. & Kroner, Kenneth F., 1995. "Multivariate Simultaneous Generalized ARCH," Econometric Theory, Cambridge University Press, vol. 11(01), pages 122-150, February.
  4. Kim, Suk-Joong & Kortian, Tro & Sheen, Jeffrey, 2000. "Central bank intervention and exchange rate volatility -- Australian evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(3-4), pages 381-405, December.
  5. Ozge Akinci & Olcay Yucel Culha & Umit Ozlale & Gulbin Sahinbeyoglu, 2005. "The Effectiveness of Foreign Exchange Interventions for the Turkish Economy : A Post-Crisis Period Analysis," Working Papers 0506, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  6. Frenkel, Michael & Pierdzioch, Christian & Stadtmann, Georg, 2005. "The effects of Japanese foreign exchange market interventions on the yen/U.S. dollar exchange rate volatility," International Review of Economics & Finance, Elsevier, vol. 14(1), pages 27-39.
  7. Baillie, Richard T. & Osterberg, William P., 1997. "Why do central banks intervene?," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 909-919, December.
  8. Ozge Akinci & Olcay Yucel Culha & Umit Ozlale & Gulbin Sahinbeyoglu, 2005. "Causes and Effectiveness of Foreign Exchange Interventions for the Turkish Economy," Working Papers 0505, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
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