Do Interventions in Foreign Exchange Markets Modify Investors' Expectations? The Experience of Japan between 1992 and 2003

CEREG - Cahier de recherche No. 2005-04

38 Pages Posted: 25 Mar 2008

See all articles by Jerome Teiletche

Jerome Teiletche

Unigestion

Christophe Morel

Université Paris Dauphine - DRM-CEREG

Date Written: January 2005

Abstract

The purpose of this paper is to analyze the impact of the Bank of Japan's official interventions on the JPY/USD parity during the period 1992-2003. The novelty of our approach is to combine two recent advances of the empirical literature on foreign exchange interventions: (i) drawing on over-the-counter option prices to characterize more precisely the distribution of market expectations; (ii) redefining interventions in terms of events as they tend to come in clusters. Moreover, in order to deal with the features of the data (small sample size, non-standard distribution), we use bootstrap tests.

We show that interventions have a significant impact on the mean expectation (the forward rate). The results are more ambiguous for variance. Additionally, we find that the effect of interventions on skewness is significant, robust to different definitions of skewness, and consistent with the direction of interventions. On the contrary, our results clearly show that kurtosis is not affected by interventions. We finally show that: (i) coordination increases effectiveness of interventions; (ii) results are not altered when controlling for other economic and political news.

Keywords: FX interventions, risk-neutral density, event study, bootstrap, Bank of Japan

JEL Classification: F31, F33, F42, G14

Suggested Citation

Teiletche, Jerome and Morel, Christophe, Do Interventions in Foreign Exchange Markets Modify Investors' Expectations? The Experience of Japan between 1992 and 2003 (January 2005). CEREG - Cahier de recherche No. 2005-04. Available at SSRN: https://ssrn.com/abstract=1112963 or http://dx.doi.org/10.2139/ssrn.1112963

Jerome Teiletche (Contact Author)

Unigestion ( email )

8c, avenue de Champel CP 387
CP 387
Genève 12, CH 1211
Switzerland

Christophe Morel

Université Paris Dauphine - DRM-CEREG ( email )

place du Maréchal de Lattre de Tassigny
cedex 16
Paris, 75775
France

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