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An Ex-Post Empirical Investigation of the Efficacy of Central Bank Interventions in Currency Markets: Bilateral Exchange Rate of the Dollar

  • Bahram Adrangi

    ()

    (Pamplin School of Business Administration, The University of Portland, U.S.A.)

  • Mary Allender

    ()

    (Pamplin School of Business Administration, The University of Portland, U.S.A.)

  • Kambiz Raffiee

    ()

    (The University of Nevada, Reno, U.S.A.)

Registered author(s):

    This paper investigates the role of central bank intervention in currency markets. Specifically, the bilateral exchange rates of the dollar versus the British pound, Swiss franc, and the yen are examined. Central banks conduct open market operations in order to regulate exchange rates in currency markets. The daily data and appropriate EGARCH models, which account for information asymmetry, provide the time varying volatility measures in the market for the three exchange rates. It is shown that the ex-post daily volatility in two out of three cases rises with central bank market interventions, while there is no statistically significant reaction in the daily volatility. Our findings suggest that rational expectations of currency traders may be responsible for these findings. Furthermore, our findings show that central bank expectations of intervention and reality of exchange rate behavior may be inconsistent.

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    File URL: http://www.bapress.ca/Journal-4/An%20Ex-Post%20Empirical%20Investigation%20of%20the%20Efficacy%20of%20Central%20Bank%20Interventions%20in%20Currency%20Markets.pdf
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    Article provided by Better Advances Press, Canada in its journal Review of Economics & Finance.

    Volume (Year): 1 (2011)
    Issue (Month): (August)
    Pages: 19-34

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    Handle: RePEc:bap:journl:110402
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    1. Mark P. Taylor, 2004. "Is Official Exchange Rate Intervention Effective?," Economica, London School of Economics and Political Science, vol. 71, pages 1-11, 02.
    2. Kathryn M.E. Dominguez, 2003. "When Do Central Bank Interventions Influence Intra-Daily and Longer-Term Exchange Rate Movements?," NBER Working Papers 9875, National Bureau of Economic Research, Inc.
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    4. Sarno, Lucio & Taylor, Mark P, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective, and, If So, How Does It Work?," CEPR Discussion Papers 2690, C.E.P.R. Discussion Papers.
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    11. Kim, Suk-Joong & Sheen, Jeffrey, 2006. "Interventions in the Yen-dollar spot market: A story of price, volatility and volume," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 3191-3214, November.
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    15. Suardi, Sandy, 2008. "Central bank intervention, threshold effects and asymmetric volatility: Evidence from the Japanese yen-US dollar foreign exchange market," Economic Modelling, Elsevier, vol. 25(4), pages 628-642, July.
    16. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
    17. Dominguez, Kathryn M., 1998. "Central bank intervention and exchange rate volatility1," Journal of International Money and Finance, Elsevier, vol. 17(1), pages 161-190, February.
    18. Catherine Bonser-Neal, 1996. "Does central bank intervention stabilize foreign exchange rates?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 43-57.
    19. Brissimis, Sophocles N. & Chionis, Dionysios P., 2004. "Foreign exchange market intervention: implications of publicly announced and secret intervention for the euro exchange rate and its volatility," Journal of Policy Modeling, Elsevier, vol. 26(6), pages 661-673, September.
    20. 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.
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