Foreign Exchange Market Intervention in Two Small Open Economies: The Canadian and Australian Experience
AbstractThis paper provides and empirical assessment of the effectiveness of foreign exchange intervention in two small open economies. Specifically, we examine the intervention practices of the Bank of Canada (BoC) and the Reserve Bank of Australia (RBA) for a sample of daily data spanning the period from 1989 to the end of 1997. Our analysis suggests that both central bank intervene in foreign exchange markets in response to excessive exchange rate volatility and uncertainty. Volatility is measured using the implied volatility of foreign currency futures options and uncertainty is proxied using the kurtosis of the implied risk-neutral probability density functions. The latter are derived using the implied volatility of options on foreign currency futures. We also examine whether the introduction of inflation targets affected the success of interventions. in the foreign exchange market. Unlike other studies in this area we also explicitly consider the role of commodity futures prices which turn out to be important in understanding the effectiveness of intervention. We find that central bank intervention in the foreign exchange amrket was largely unsuccessful in both countries though volatility and kurtosis were modestly affected.
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Bibliographic InfoPaper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 57.
Date of creation: 01 Jun 2001
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Other versions of this item:
- Rogers, J. M. & Siklos, P. L., 2003. "Foreign exchange market intervention in two small open economies: the Canadian and Australian experience," Journal of International Money and Finance, Elsevier, vol. 22(3), pages 393-416, June.
- F31 - International Economics - - International Finance - - - Foreign Exchange
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