Central bank interventions and jumps in double long memory models of daily exchange rates

Michel Beine*, Sébastien Laurent

*Corresponding author for this work

Research output: Contribution to journalArticle

40 Citations (Scopus)

Abstract

In this paper, we estimate ARFIMA-FIGARCH models for the major exchange rates (against the US dollar) which have been subject to direct central bank interventions in the last decades. We show that the normality assumption is not adequate due to the occurrence of volatility outliers and its rejection is related to these interventions. Consequently, we rely on a normal mixture distribution that allows for endogenously determined jumps in the process governing the exchange rate dynamics. This distribution performs rather well and is found to be important for the estimation of the persistence of volatility shocks. Introducing a time-varying jump probability associated to central bank interventions, we find that the central bank interventions, conducted in either a coordinated or unilateral way, induce a jump in the process and tend to increase exchange rate volatility.

Original languageEnglish
Pages (from-to)641-660
Number of pages20
JournalJournal of Empirical Finance
Volume10
Issue number5
DOIs
Publication statusPublished - Dec 2003

Keywords

  • ARFIMA process
  • Central bank interventions
  • Exchange rate dynamics
  • Fractionally integrated GARCH
  • Normal mixtures

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