Conditional covariances and direct central bank interventions in the foreign exchange markets

Michel Beine*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

36 Citations (Scopus)

Abstract

In this paper, we investigate the effects of central bank interventions (CBIs) on the ex post correlation and covariance of exchange rates. Using a multivariate GARCH model with time-varying conditional covariances, we estimate the effects of CBIs on both the variances and covariance between the yen and the deutsche mark (the Euro) in terms of the US dollar. Our results suggest that coordinated CBIs not only tend to increase the volatility of exchange rates but also explain a significant amount of the covariance between the major currencies. We show that this result can be useful for short-run currency portfolio management.

Original languageEnglish
Pages (from-to)1385-1411
Number of pages27
JournalJournal of Banking and Finance
Volume28
Issue number6
DOIs
Publication statusPublished - Jun 2004

Keywords

  • Central bank interventions
  • Conditional correlations
  • Foreign exchange markets
  • Multivariate GARCH
  • Portfolio management

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