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Central Bank intervention and exchange rate volatility: its continuous and jump components

Author

Listed:
  • Michel Beine
  • Jérôme Lahaye
  • Sébastien Laurent
  • Christopher Neely
  • Franz Palm

Abstract

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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Suggested Citation

  • Michel Beine & Jérôme Lahaye & Sébastien Laurent & Christopher Neely & Franz Palm, 2007. "Central Bank intervention and exchange rate volatility: its continuous and jump components," ULB Institutional Repository 2013/10413, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:ulb:ulbeco:2013/10413
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • C34 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Truncated and Censored Models; Switching Regression Models

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