Is Foreign Exchange Intervention Effective? Some Micro-Analytical Evidence from the Czech Republic

Abstract

We test the effectiveness of the interventions performed by the Czech National Bank in the EUR/CZK within the framework of the Evans-Lyons (JME, 2002) microstructure model of the forex market. Employing time-stamped quotes and transactions on the Reuters Spot Matching market, we estimate a two-equation system on the rate change and order flow at hourly intervals. We find a significant impact of order flow on the exchange rate, equal on average to 7.6 basis points per €10 million in the whole sample period, 80 percent of which persists through the day. The existence of distinct subperiods enables us to estimate the potential effects of intervention in three different states of the market. First, the central bank might perform secret interventions in orderly market conditions, when dealers perceive a low likelihood of their occurrence. Second, secret interventions might take place in a state characterized by a high likelihood of their occurrence. The third state is characterized by the market's knowledge that intervention is indeed taking place. Our results lend support to the theoretical model and provide useful insight on the conditions for effective central bank intervention in the future.

Foreign Exchange Intervention in Emerging Markets: A Survey of Empirical Studies

“…As a benchmark for assessing the impact, one may refer to the Evans and Lyons (2005) estimate of the impact that ordinary order flow has on the exchange rate, which is estimated as 0.44 basis points per US$10 million order flow in the most liquid Deutsche mark versus US dollar market in 1996. Compared to this benchmark, the respective figures for the Czech experience of between 7 and 12 basis points per 10 million euro seem remarkably high (Scalia, 2008). This gap in favour of intervention impact in emerging markets is underlined by available data from the other studies as reported in (in the Appendix).…”

“…Another methodological variation is provided by Scalia (2008), who also analyses interventions in the market for the Czech koruna versus the euro between July and December 2002. The author examines order flow, that is, signed transactions which one can see as a measure of net buying pressure (Lyons, 2001), covering an estimated 35 per cent share of the market.…”

“…Recognising this bottleneck, one should also accept the difficulty in examining volatility effects without high‐frequency data; indeed, the results of the available lower‐frequency studies are often inconclusive, see the cases of Turkey and Czech Republic discussed above. So, it would be most interesting to extend the high‐frequency examination to emerging markets beyond the papers by Scalia (2008) and Melvin et al (2009).…”

The Relative Effectiveness of Spot and Derivatives Based Intervention: The Case of Brazil

“…4 The findings of more recent cross country studies (Adler et al 2015;Blanchard et al 2015;Fratzscher et al, 2015) that include a large number of emerging economies, in turn, are more supportive of such a link. Similarly, several recent studies of emerging economies confirm that spot FXI may not only impact the exchange rate but also its volatility (Scalia, 2008;Broto, 2013;Fry and Wanaguru, 2013). Nevertheless, it appears that these findings cannot be generalized to all countries and sample periods.…”

Exchange rate dynamics, forecasting and the microstructure approach: empirical evidence for an emerging market economy

“…Some authors explore the relevance of the microstructure approach for other emerging market economies but, to the best of the author's knowledge, none specifically focus on the intersection between macro-fundamentals and microstructure models. See, for example, Scalia (2008), Melvin, Menkhoff, andSchmeling (2009) andDe Roure, Furnagiev, andReitz (2013). 2.…”