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The intraday effects of central bank intervention on exchange rate spreads

Author Info

  • Fatum, Rasmus
  • Pedersen, Jesper
  • Sørensen, Peter Norman

Abstract

We investigate the intraday effects of intra-marginal intervention in a horizontal band on the exchange rate spread. Official intraday data on Danish intervention transactions in the ERM II, the Exchange Rate Mechanism of the European Union, facilitates our analysis. We show that intervention purchases and sales both exert a significant influence on the exchange rate spread, but in opposite directions. Intervention purchases of the small currency, on average, narrow the spread while intervention sales of the small currency, on average, widen the spread. This is a novel finding that differs from those of existing studies that find intervention always widens the exchange rate spread and increases market uncertainty.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 33 (2013)
Issue (Month): C ()
Pages: 103-117

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Handle: RePEc:eee:jimfin:v:33:y:2013:i:c:p:103-117
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

Keywords: Foreign exchange intervention; ERM II; Exchange rate spreads; Intraday data;

Find related papers by JEL classification:

  • 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
  • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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  1. Brandner, Peter & Grech, Harald & Stix, Helmut, 2006. "The effectiveness of central bank intervention in the EMS: The post 1993 experience," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 580-597, June.
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  9. Ito, Takatoshi & Yabu, Tomoyoshi, 2007. "What prompts Japan to intervene in the Forex market? A new approach to a reaction function," Journal of International Money and Finance, Elsevier, vol. 26(2), pages 193-212, March.
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  16. Pasquariello, Paolo, 2007. "Informative trading or just costly noise? An analysis of Central Bank interventions," Journal of Financial Markets, Elsevier, vol. 10(2), pages 107-143, May.
  17. Ghosh, Atish R., 2002. "Central bank secrecy in the foreign exchange market," European Economic Review, Elsevier, vol. 46(2), pages 253-272, February.
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Cited by:

  1. Rodríguez-Aguilar, Román & Cruz-Aké, Salvador & Venegas-Martínez, Francisco, 2014. "A Measure of Early Warning of Exchange-Rate Crises Based on the Hurst Coefficient and the Αlpha-Stable Parameter," MPRA Paper 59046, University Library of Munich, Germany.
  2. Vithessonthi, Chaiporn & Tongurai, Jittima, 2014. "The spillover effects of unremunerated reserve requirements: Evidence from Thailand," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 338-351.

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