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Does Exchange Rate Intervention Trigger Volatility?

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  • M. Ramachandran
  • G.Ananda Vadivelu

Abstract

This study aims at investigating two important issues concerning the exchange rate intervention policy of the Reserve Bank of India: (1) whether there is any asymmetry in intervention; and (2) whether intervention triggers volatility. The empirical evidence derived from a class of GARCH and A-PARCH models indicate the latter one fits the data much better than the conventional GARCH models. Further, intervention seems to have increased exchange rate volatility; the official sale of foreign exchange have had a relatively larger impact on exchange volatility than official purchase. This is consistent with the argument that secret intervention creates ambiguity in the market; hence, it results in larger volatility of exchange rate.

Suggested Citation

  • M. Ramachandran & G.Ananda Vadivelu, 2016. "Does Exchange Rate Intervention Trigger Volatility?," Working Papers id:8683, eSocialSciences.
    • Handle: RePEc:ess:wpaper:id:8683
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    References listed on IDEAS

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    1. Pami Dua & Ritu Suri, 2019. "Interlinkages Between USD–INR, EUR–INR, GBP–INR and JPY–INR Exchange Rate Markets and the Impact of RBI Intervention," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 18(1_suppl), pages 102-136, April.

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    More about this item

    Keywords

    Exchange rate; foreign exchange reserve; ARCH; GARCH; A-PARCH; intervention policy; Reserve Bank of India; exchange rate volatility; foreign exchange; market;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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