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Signaling Effects of Foreign Exchange Interventions and Expectation Heterogeneity among Traders


  • Iwatsubo, Kentaro
  • Shimizu, Junko


This paper explores whether official intervention signaling effects on short-run exchange rate movements depend on market conditions. We find evidence that announced interventions significantly affect the level and reduce the volatility of the yen/dollar rate when traders' expectations of future exchange rates are relatively heterogeneous. To compensate for the lack of daily exchange rate expectation survey data, we use implied volatility as a proxy since these are highly correlated. These results are consistent with predictions from the market microstructure models with asymmetric information across agents and the signaling hypothesis of foreign exchange interventions. Our findings indicate that the efficacy of intervention hinges not only on the firmness of signals but also on the degree of expectation heterogeneity among traders.

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  • Iwatsubo, Kentaro & Shimizu, Junko, 2006. "Signaling Effects of Foreign Exchange Interventions and Expectation Heterogeneity among Traders," CEI Working Paper Series 2005-18, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hit:hitcei:2005-18
    Note: First draft: August 18, 2004; This version: October 27, 2005

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    References listed on IDEAS

    1. Cheung, Yin-Wong & Chinn, Menzie David, 2001. "Currency traders and exchange rate dynamics: a survey of the US market," Journal of International Money and Finance, Elsevier, vol. 20(4), pages 439-471, August.
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    More about this item


    Foreign exchange intervention; Announcements; Expectation heterogeneity;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange


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