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Central bank intervention and exchange rate volatility, its continuous and jump components

  • Michel Beine
  • Jérôme Lahaye
  • Sébastien Laurent
  • Christopher J. Neely
  • Franz C. Palm

We analyze the relationship between interventions and volatility at daily and intra-daily frequencies for the two major exchange rate markets. Using recent econometric methods to estimate realized volatility, we employ bipower variation to decompose this volatility into a continuously varying and jump component. Analysis of the timing and direction of jumps and interventions imply that coordinated interventions tend to cause few, but large jumps. Most coordinated operations explain, statistically, an increase in the persistent (continuous) part of exchange rate volatility. This correlation is even stronger on days with jumps.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2006-031.

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Date of creation: 2007
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Handle: RePEc:fip:fedlwp:2006-031
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  1. Comte, F. & Renault, E., 1996. "Long Memory in Continuous Time Stochastic Volatility Models," Papers 96.406, Toulouse - GREMAQ.
  2. Neil Shephard & Ole E. Barndorff-Nielsen, 2002. "Estimating quadratic variation using realised variance," Economics Series Working Papers 2001-W20, University of Oxford, Department of Economics.
  3. Ole E. Barndorff-Nielsen, 2004. "Power and Bipower Variation with Stochastic Volatility and Jumps," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 2(1), pages 1-37.
  4. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold, 2005. "Roughing it Up: Including Jump Components in the Measurement, Modeling and Forecasting of Return Volatility," NBER Working Papers 11775, National Bureau of Economic Research, Inc.
  5. repec:rus:hseeco:21608 is not listed on IDEAS
  6. Dominguez & K., 1997. "The Market Microstructure of Central Bank Intervention," Working Papers 412, Research Seminar in International Economics, University of Michigan.
  7. Ole E. Barndorff-Nielsen & Shephard, 2002. "Econometric analysis of realized volatility and its use in estimating stochastic volatility models," Journal of the Royal Statistical Society Series B, Royal Statistical Society, vol. 64(2), pages 253-280.
  8. Andersen T. G & Bollerslev T. & Diebold F. X & Labys P., 2001. "The Distribution of Realized Exchange Rate Volatility," Journal of the American Statistical Association, American Statistical Association, vol. 96, pages 42-55, March.
  9. Christopher J. Neely, 2005. "An analysis of recent studies of the effect of foreign exchange intervention," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 685-718.
  10. Neil Shephard & Ole E. Barndorff-Nielsen, 2003. "Power and bipower variation with stochastic volatility and jumps," Economics Series Working Papers 2003-W18, University of Oxford, Department of Economics.
  11. Beine, Michel & Benassy-Quere, Agnes & Lecourt, Christelle, 2002. "Central bank intervention and foreign exchange rates: new evidence from FIGARCH estimations," Journal of International Money and Finance, Elsevier, vol. 21(1), pages 115-144, February.
  12. Kearns, Jonathan & Rigobon, Roberto, 2005. "Identifying the efficacy of central bank interventions: evidence from Australia and Japan," Journal of International Economics, Elsevier, vol. 66(1), pages 31-48, May.
  13. Christopher J. Neely, 2006. "Identifying the effects of U.S. intervention on the levels of exchange rates," Working Papers 2005-031, Federal Reserve Bank of St. Louis.
  14. Baillie, Richard T. & Osterberg, William P., 1997. "Why do central banks intervene?," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 909-919, December.
  15. Andreas M. Fischer, 2005. "On the Inadequacy of Newswire Reports for Empirical Research on Foreign Exchange Interventions," Working Papers 2005-02, Swiss National Bank.
  16. Christopher J. Neely, 2000. "The practice of central bank intervention: looking under the hood," Working Papers 2000-028, Federal Reserve Bank of St. Louis.
  17. Bonser-Neal, Catherine & Tanner, Glenn, 1996. "Central bank intervention and the volatility of foreign exchange rates: evidence from the options market," Journal of International Money and Finance, Elsevier, vol. 15(6), pages 853-878, December.
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