A New Method for Identifying the Effects of Foreign Exchange Interventions

Abstract

Central banks react even to intraday changes in the exchange rate; however, in most cases, intervention data is available only at a daily frequency. This temporal aggregation makes it difficult to identify the effects of interventions on the exchange rate. We apply the Bayesian MCMC approach to this endogeneity problem. We use "data augmentation" to obtain intraday intervention amounts and estimate the efficacy of interventions using the augmented data. Applying this new method to Japanese data, we find that an intervention of one trillion yen moves the yen/dollar rate by 1.7 percent, which is more than twice as much as the magnitude reported in previous studies applying OLS to daily observations. This shows the quantitative importance of the endogeneity problem due to temporal aggregation. JEL Classification Numbers: C11, C22, F31, F37

The Dynamic Impact of FX Interventions on Financial Markets

“…For Japan, a one standard deviation intervention shock, corresponding to purchases of 1.7 billion USD, leads to an immediate depreciation of about 0.2% relative to the US-Dollar, Pound and Euro. A comparison with previous findings (e.g., Kearns and Rigobon, 2005;Chen et al, 2012), and considering the same sample (shorter than our full sample), shows that our estimate is at the upper end of the available evidence, consistent with the argument that accounting for measurement error reduces the attenuation bias and leads to more precise estimates of the efficacy of FX interventions.…”

A new approach to the effect of intervention frequency on the foreign exchange market: evidence from Japan

“…Therefore, we tend to underestimate the number of interventions and ignore the endogeneity problem as pointed out in Chen et al (2009). 28 This article focuses on the frequency of foreign exchange interventions, and therefore, it is very important to consider these problems.…”

“…21 We think that the effectiveness may differ from above-average-sized interventions if they persist over a number of days. These ideas come from the assertions in Ito and Yabu (2007) and Chen et al (2009). They suggest that if intervention was carried out the previous day, then the political cost is less, because the decision is already secured once, and hence, the additional cost on the next day is much less.…”

Technological bias at the exchange rate market

“…Traders still use different tools for exchange rate forecasting in the currency market to get a reliable decision‐making technique. Several principal arguments revealed in the economic literature go against the EMH in the foreign exchange market: (i) technical analysis is still profitable in spite of the ‘market efficiency’ (Qi & Wu, ; Schulmeister, ); (ii) the significant stake of the central bank interventions in ‘making market inefficiency’ (Chen, Watanabe, & Yabu, ; Hu, ); (iii) doubts about full market liquidity and rationality of exchange rate market participants (Stanley, Kinsman, & Samuelson, ), as well as a lack of confidence about any informational bias concerning all market participants (Bjønnes, Osler, Rime, & Bank, ; Boya, ).…”