Volatility expectations and asymmetric effects of direct interventions in the FX market

Michel Beine

doi:10.1016/S0889-1583(03)00002-9

Volatility expectations and asymmetric effects of direct interventions in the FX market

Michel Beine^*

^*Corresponding author for this work

Department of Economics

Research output: Contribution to journal › Article › peer-review

5 Citations (Scopus)

Abstract

In this paper, I investigate the effects of central bank interventions (CBI) on ex-ante exchange rate volatility. I measure volatility expectations by implied volatilities estimated from at-the-money currency options prices. Using a Markov switching model, I estimate the effects of CBI which depend on market conditions. The results suggest that the effects of CBI depend on the prevailing volatility regime. It is found that CBI on the DEM-USD market were not necessarily destabilizing after the Louvre Agreement when expected volatility was relatively high.

Original language	English
Pages (from-to)	55-80
Number of pages	26
Journal	Journal of the Japanese and International Economies
Volume	17
Issue number	1
DOIs	https://doi.org/10.1016/S0889-1583(03)00002-9
Publication status	Published - Mar 2003

Keywords

Central bank interventions
Exchange rate volatility
Implied volatility
Markov switching model

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10.1016/S0889-1583(03)00002-9

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abstract = "In this paper, I investigate the effects of central bank interventions (CBI) on ex-ante exchange rate volatility. I measure volatility expectations by implied volatilities estimated from at-the-money currency options prices. Using a Markov switching model, I estimate the effects of CBI which depend on market conditions. The results suggest that the effects of CBI depend on the prevailing volatility regime. It is found that CBI on the DEM-USD market were not necessarily destabilizing after the Louvre Agreement when expected volatility was relatively high.",

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AB - In this paper, I investigate the effects of central bank interventions (CBI) on ex-ante exchange rate volatility. I measure volatility expectations by implied volatilities estimated from at-the-money currency options prices. Using a Markov switching model, I estimate the effects of CBI which depend on market conditions. The results suggest that the effects of CBI depend on the prevailing volatility regime. It is found that CBI on the DEM-USD market were not necessarily destabilizing after the Louvre Agreement when expected volatility was relatively high.

KW - Central bank interventions

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KW - Implied volatility

KW - Markov switching model

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ER -

Volatility expectations and asymmetric effects of direct interventions in the FX market

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Keywords

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