Bank of Japan Interventions, Exchange Rate Volatility, and Spillover Effects: Evidence from High Frequency Data

Posted: 25 Aug 2007

See all articles by Georgios E. Chortareas

Georgios E. Chortareas

University of Athens - Faculty of Economics; University of Essex - Department of Accounting, Finance & Management; King's College London

Ying Jiang

The University of Nottingham Ningbo, China

John C. Nankervis

University of Essex - Department of Accounting, Finance & Management

Date Written: August 2007

Abstract

We consider the effect of interventions by the Bank of Japan in the foreign exchange market during the period 2000-2004. During this period the interventions are of substantial magnitude, relatively frequent, not co-ordinated and take place within the 'zero interest rate' monetary policy regime. Only scant evidence exists in the literature on the spillover effect and the impact on covariance in both daily and intraday frameworks, as well as on analyzing the characteristics of intraday volatility dynamics on both intervention days and non-intervention days. In contrast to earlier studies, our analysis does not hinge on the assumption that intervention always increases the volatility of the exchange rate. We perform rolling estimations of a Multivariate GARCH model, use the quartile plots of intraday volatility, and perform equal variance tests to investigate intraday volatility characteristics on intervention and non-intervention days using both daily and 15-minute data. Our findings suggest that Band of Japan interventions decrease the volatility of the yen/USD exchange rate. This result contrasts with the findings of earlier studies which typically find that interventions result in higher volatility. The effect of interventions on the yen/USD volatility depends on the different states that the market experiences and its impact is different under high and low levels of exchange rate volatility. We also find the intraday volatility is less heteroskedastic within the intervention day and this has implications for volatility forecasting. We find strong evidence that intervention in the USD/YEN increases the volatility of the Euro/Yen.

Keywords: foreign exchange market, central bank intervention, Bank of Japan

JEL Classification: F31

Suggested Citation

Chortareas, Georgios and Jiang, Ying and Nankervis, John C., Bank of Japan Interventions, Exchange Rate Volatility, and Spillover Effects: Evidence from High Frequency Data (August 2007). 20th Australasian Finance & Banking Conference 2007 Paper. Available at SSRN: https://ssrn.com/abstract=1009662

Georgios Chortareas

University of Athens - Faculty of Economics ( email )

8 Pesmazoglou street
GR-10559 Athens
Greece
+(30) 210 3689805 (Phone)
+(30) 210 3689810 (Fax)

University of Essex - Department of Accounting, Finance & Management ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

King's College London ( email )

Strand
London, England WC2R 2LS
United Kingdom

Ying Jiang

The University of Nottingham Ningbo, China ( email )

199 Taikang East Road
China

John C. Nankervis (Contact Author)

University of Essex - Department of Accounting, Finance & Management ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

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