Are the Intraday Effects of Central Bank Intervention on Exchange Rate Spreads Asymmetric and State Dependent?

34 Pages Posted: 2 Sep 2010 Last revised: 17 Jul 2015

See all articles by Rasmus Fatum

Rasmus Fatum

University of Alberta - Department of Marketing, Business Economics & Law

Jesper Pedersen

Danish Economic Councils

Peter Norman Sorensen

University of Copenhagen - Department of Economics

Date Written: August 18, 2010

Abstract

This paper investigates the intraday effects of unannounced foreign exchange intervention on bid-ask exchange rate spreads using official intraday intervention data provided by the Danish central bank. Our starting point is a simple theoretical model of the bid-ask spread which we use to formulate testable hypotheses regarding how unannounced intervention purchases and intervention sales influence the market asymmetrically. To test these hypotheses we estimate weighted least squares (WLS) time-series models of the intraday bid-ask spread. Our main result is that intervention purchases and sales both exert a significant influence on the exchange rate spread, but in opposite directions: intervention purchases of the smaller currency, on average, reduce the spread while intervention sales, on average, increase the spread. We also show that intervention only affects the exchange rate spread when the state of the market is not abnormally volatile. Our results are consistent with the notion that illiquidity arises when traders fear speculative pressure against the smaller currency and confirms the asymmetry hypothesis of our theoretical model.

Keywords: Foreign Exchange Intervention, Exchange Rate Spreads, Intraday Data

JEL Classification: D53, E58, F31, G15

Suggested Citation

Fatum, Rasmus and Pedersen, Jesper and Sorensen, Peter Norman, Are the Intraday Effects of Central Bank Intervention on Exchange Rate Spreads Asymmetric and State Dependent? (August 18, 2010). University of Alberta School of Business Research Paper No. 2013-1307, University of Copenhagen Dept. of Economics Discussion Paper No. 10-20, Available at SSRN: https://ssrn.com/abstract=1669896 or http://dx.doi.org/10.2139/ssrn.1669896

Rasmus Fatum (Contact Author)

University of Alberta - Department of Marketing, Business Economics & Law ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-3951 (Phone)
780-492-3325 (Fax)

HOME PAGE: http://www.bus.ualberta.ca/rfatum

Jesper Pedersen

Danish Economic Councils ( email )

Amaliegade 44
Copenhagen K, DK-1256
Denmark

Peter Norman Sorensen

University of Copenhagen - Department of Economics ( email )

Oster Farimagsgade 5
Building 26
Copenhagen K, 1353
Denmark
+45 35 32 3056 (Phone)

HOME PAGE: http://www.econ.ku.dk/sorensen

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