Automating Exchange Rate Target Zones: Intervention Via an Electronic Limit Order Book

48 Pages Posted: 19 Feb 2008

See all articles by Michael Melvin

Michael Melvin

University of California, San Diego (UCSD) - Rady School of Management; CESifo (Center for Economic Studies and Ifo Institute)

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin); Humboldt University of Berlin - Faculty of Economics

Maik Schmeling

Goethe University Frankfurt - Department of Finance; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: February 2008

Abstract

This paper describes and analyzes "automated intervention" of a target zone. Unusually detailed information about the order book allows studying intervention effects in a microstructure approach. We find in our sample that intervention increases exchange rate volatility (and spread) for the next minutes but that intervention days show a lower degree of volatility (and spread) than non-intervention days. We also show for intraday data that the price impact of interbank order flow is smaller on intervention days than on non-intervention days. Finally, we reveal that informed banks take different positions than uninformed banks as they tend to trade against the central bank - which reflects a rational stance. Despite this position taking, the targeted exchange rate range holds and volatility, spread and price impact go down. Overall, the credible expression of an intervention band seems to achieve the desired effects of a target zone.

Keywords: foreign exchange, microstructure, intervention, exchange rate

JEL Classification: F31

Suggested Citation

Melvin, Michael and Menkhoff, Lukas and Schmeling, Maik, Automating Exchange Rate Target Zones: Intervention Via an Electronic Limit Order Book (February 2008). CESifo Working Paper Series No. 2221. Available at SSRN: https://ssrn.com/abstract=1095127

Michael Melvin (Contact Author)

University of California, San Diego (UCSD) - Rady School of Management ( email )

9500 Gilman Drive
Rady School of Management
La Jolla, CA 92093
United States

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Humboldt University of Berlin - Faculty of Economics ( email )

Spandauer Strasse 1
Berlin
Germany

Maik Schmeling

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

HOME PAGE: http://sites.google.com/site/maikschmeling/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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