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Interventions and Expected Exchange Rates in Emerging Market Economies

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  • Santiago García-Verdú
  • Manuel Ramos Francia

Abstract

We study variations in the risk-neutral distributions of the exchange rates in Brazil, Chile, Colombia, Mexico, and Peru due to interventions implemented by these countries. For this purpose, we first estimate the risk-neutral densities of the exchange rates based on derivatives market data, for one-day and one-week horizons. Second, using a linear regression model, we assess possible effects on the distributions of the expected exchange rates due to these interventions. We find little evidence of an effect on the expected exchange rates' means, volatilities, skewness, kurtoses, risk premia, and tails' parameters. In the few cases for which we do find some statistical evidence of an effect, it tends to be short-lived or not economically significant. On the other hand, we find evidence that interventions which objective is to restore and/or assure the proper functioning of exchange rate markets have a higher probability of success. This probability increases as the amount of resources to intervene at disposal of the central bank increases. Needless to say, there are limits to the methodology we use.

Suggested Citation

  • Santiago García-Verdú & Manuel Ramos Francia, 2014. "Interventions and Expected Exchange Rates in Emerging Market Economies," Working Papers 2014-11, Banco de México.
  • Handle: RePEc:bdm:wpaper:2014-11
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    File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7BA24E41FE-2BBA-C659-A8EF-717082FFB19D%7D.pdf
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    References listed on IDEAS

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    1. Bayoumi, Tamim & Saborowski, Christian, 2014. "Accounting for reserves," Journal of International Money and Finance, Elsevier, vol. 41(C), pages 1-29.
    2. 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, pages 393-416.
    3. Gnabo, Jean-Yves & Teiletche, Jérôme, 2009. "Foreign-exchange intervention strategies and market expectations: insights from Japan," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 19(3), pages 432-446, July.
    4. Gustavo Abarca & Claudia Ramírez & José Gonzalo Rangel, 2012. "Capital Controls and Exchange Rate Expectations in Emerging Markets," Working Papers 2012-08, Banco de México.
    5. Ken Miyajima & Carlos Montoro, 2013. "Impact of foreign exchange interventions on exchange rate expectations," BIS Papers chapters,in: Bank for International Settlements (ed.), Sovereign risk: a world without risk-free assets?, volume 73, pages 39-54 Bank for International Settlements.
    6. Christopher J. Neely, 2001. "The practice of central bank intervention: looking under the hood," Review, Federal Reserve Bank of St. Louis, issue May, pages 1-10.
    7. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, pages 839-868.
    8. Broto, Carmen, 2013. "The effectiveness of forex interventions in four Latin American countries," Emerging Markets Review, Elsevier, vol. 17(C), pages 224-240.
    9. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, pages 839-868.
    10. Dominguez, Kathryn M & Frankel, Jeffrey A, 1993. "Does Foreign-Exchange Intervention Matter? The Portfolio Effect," American Economic Review, American Economic Association, pages 1356-1369.
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    Cited by:

    1. Tobal Martín & Yslas Renato, 2016. "Two Models of FX Market Interventions: The Cases of Brazil and Mexico," Working Papers 2016-14, Banco de México.

    More about this item

    Keywords

    Interventions; Exchange Rates; Risk-Neutral Distributions; Generalized Extreme; Value Distributions.;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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