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Perceived central bank intervention and market expectations: an empirical study of the yen/dollar exchange rate, 1993 - 96

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  • William Melick

    (Kenyon College)

  • Gabriele Galati

Abstract

This paper uses a new data set, based on Reuters news articles, to capture intervention that is perceived by FX traders and probability density functions (PDFs) estimated from option data to describe market expectations. We find that, between September 1993 and April 1996, traders viewed the Bank of Japan as responding mainly to deviations of the exchange rate from what they considered to be some implicit target levels. On the other hand, the Federal Reserve was viewed to have mainly intervened when market conditions seemed most conducive to a successful intervention. We find that perceived intervention had no statistically significant effect on the exchange rate level and on the skewness of the PDFs. We also present evidence that, on average, perceived intervention increased traders' uncertainty about future exchange rate movements.

Suggested Citation

  • William Melick & Gabriele Galati, 1999. "Perceived central bank intervention and market expectations: an empirical study of the yen/dollar exchange rate, 1993 - 96," BIS Working Papers 77, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:77
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    References listed on IDEAS

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    1. Catherine Bonser-Neal & Glenn Tanner, 1995. "Central bank intervention and the volatility of foreign exchange rates: evidence from the options market," Research Working Paper 95-04, Federal Reserve Bank of Kansas City.
    2. Richard T. Baillie & Owen F. Humpage, 1992. "Post-Louvre intervention: did target zones stabilize the dollar?," Working Papers (Old Series) 9203, Federal Reserve Bank of Cleveland.
    3. Almekinders, Geert J. & Eijffinger, Sylvester C. W., 1996. "A friction model of daily Bundesbank and Federal Reserve intervention," Journal of Banking & Finance, Elsevier, vol. 20(8), pages 1365-1380, September.
    4. Geert J. Almekinders, 1995. "Foreign Exchange Intervention," Books, Edward Elgar Publishing, number 71.
    5. Kathryn M. Dominguez, 1993. "Does Central Bank Intervention Increase the Volatility of Foreign Exchange Rates?," NBER Working Papers 4532, National Bureau of Economic Research, Inc.
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