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Central bank intervention and exchange rate volatility: Evidence from Japan using realized volatility

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  • Cheng, Ai-ru (Meg)
  • Das, Kuntal
  • Shimatani, Takeshi

Abstract

This paper presents new empirical evidence on the effectiveness of Bank of Japan's foreign exchange interventions on the daily realized volatility of USD/JPY exchange rates using high frequency data. Following Huang and Tauchen (2005) and Barndorff-Nielsen and Shephard (2004, 2006), we use bi-power variation to decompose daily realized volatility into two components: the smooth persistent and the discontinuous jump components. We model exchange rate returns, the different components of realized volatility and the central bank intervention using a system of simultaneous equations. We find strong support that interventions by Bank of Japan had increased both the continuous and the jump components of daily realized volatility. This suggests that the interventions by Bank of Japan had increased market volatility which not only caused short-lived positive jumps, but were also persistent over time. We did not find any evidence that interventions were effective in influencing the exchange rate returns for the entire sample period.

Suggested Citation

  • Cheng, Ai-ru (Meg) & Das, Kuntal & Shimatani, Takeshi, 2013. "Central bank intervention and exchange rate volatility: Evidence from Japan using realized volatility," Journal of Asian Economics, Elsevier, vol. 28(C), pages 87-98.
  • Handle: RePEc:eee:asieco:v:28:y:2013:i:c:p:87-98
    DOI: 10.1016/j.asieco.2013.05.001
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    Cited by:

    1. repec:cml:incocp:5en-8 is not listed on IDEAS
    2. repec:kse:modern:v:2:y:2019:i:1:p:24-44 is not listed on IDEAS
    3. João Barata Ribeiro Blanco Barroso, 2018. "Realized Volatility as an Instrument to Official Intervention," Investigación Conjunta-Joint Research,in: Alberto Ortiz-Bolaños (ed.), Monetary Policy and Financial Stability in Latin America and the Caribbean, edition 1, chapter 8, pages 259-281 Centro de Estudios Monetarios Latinoamericanos, CEMLA.

    More about this item

    Keywords

    Foreign exchange intervention; Realized volatility; Simultaneous equations; Tobit model;

    JEL classification:

    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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