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Central Bank Intervention and Exchange Rate Volatility, its Continuous and Jump ComponentsMichel A. R. BeineUniversity of Luxemburg; CESifo (Center for Economic Studies and Ifo Institute for Economic Research) Jerome LahayeFacultés Universitaires Notre-Dame de la Paix (FUNDP); University of Namur; Catholic University of Louvain Sébastien LaurentMaastricht University - Department of Quantitative Economics Christopher J. NeelyFederal Reserve Bank of St. Louis - Research Division Franz C. PalmUniversity of Maastricht - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research) February 2007 FRB of St. Louis Working Paper No. 2006-031C Abstract: We analyze the relationship between interventions and volatility at daily and intra-daily frequencies for the two major exchange rate markets. Using recent econometric methods to estimate realized volatility, we employ bipower variation to decompose this volatility into a continuously varying and jump component. Analysis of the timing and direction of jumps and interventions imply that coordinated interventions tend to cause few, but large jumps. Most coordinated operations explain, statistically, an increase in the persistent (continuous) part of exchange rate volatility. This correlation is even stronger on days with jumps.
Number of Pages in PDF File: 37 Keywords: intervention, exchange rate, jumps, bi-power variation, volatility, central bank JEL Classification: F31, F33, C34 working papers seriesDate posted: May 16, 2006Suggested CitationContact Information
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