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The Effectiveness of Foreign Exchange Intervention in Australia: A Factor Model Approach with GARCH Specifications

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  • Shakila Aruman

Abstract

This paper analyses the effectiveness of foreign exchange intervention by the Reserve Bank of Australia (RBA). Initially, a latent factor model is used to decompose the volatility of exchange rates into three unobserved factors - world, numeraire and idiosyncratic. Subsequently, the impact of foreign exchange rate intervention is examined by further decomposing the numeraire (Australian) factor into an intervention component and an unobserved component. An indirect estimation approach is employed to facilitate the imposition of GARCH structures on some of the unobserved factors. The empirical results suggest that less than three percent of observed exchange rate volatility is explained by RBA intervention.

Suggested Citation

  • Shakila Aruman, 2003. "The Effectiveness of Foreign Exchange Intervention in Australia: A Factor Model Approach with GARCH Specifications," School of Economics and Finance Discussion Papers and Working Papers Series 135, School of Economics and Finance, Queensland University of Technology.
  • Handle: RePEc:qut:dpaper:135
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    File URL: http://external-apps.qut.edu.au/business/documents/discussionPapers/2003/DP%20No%20135.pdf
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    References listed on IDEAS

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    7. Jonathan Kearns & Roberto Rigobon, 2002. "Identifying the Efficacy of Central Bank Interventions: The Australian Case," NBER Working Papers 9062, National Bureau of Economic Research, Inc.
    8. Aguilar, Javiera & Nydahl, Stefan, 2000. "Central bank intervention and exchange rates: the case of Sweden," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(3-4), pages 303-322, December.
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    Cited by:

    1. Fry-McKibbin, Renée A. & Wanaguru, Sumila, 2013. "Currency intervention: A case study of an emerging market," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 25-47.

    More about this item

    Keywords

    exchange rate; latent factor model; indirect estimation;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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