Central Bank Interventions and Implied Exchange Rate Correlations

Posted: 16 Jan 2011

See all articles by Jussi Nikkinen

Jussi Nikkinen

University of Vaasa - Department of Accounting and Finance

Sami Vähämaa

University of Vaasa

Date Written: December 1, 2009

Abstract

This paper examines the effects of the foreign exchange market interventions by the Bank of Japan on the ex ante correlations between the JPY/USD, EUR/USD, and GBP/USD exchange rates. The correlation estimates used in the analysis are derived from the market prices of OTC currency options. The results show that central bank interventions significantly affect the market expectations about future exchange rate co-movements. In particular, we find that interventions tend to temporarily increase the ex ante correlations among the major exchange rates. However, our results also suggest that intervention episodes are associated with lower-than-average levels of exchange rate correlations.

Keywords: implied correlation, interventions, exchange rates, currency options

JEL Classification: E58, F31, G13, G15

Suggested Citation

Nikkinen, Jussi and Vähämaa, Sami, Central Bank Interventions and Implied Exchange Rate Correlations (December 1, 2009). Journal of Empirical Finance, Vol. 16, No. 5, 2009. Available at SSRN: https://ssrn.com/abstract=1740670

Jussi Nikkinen

University of Vaasa - Department of Accounting and Finance ( email )

P.O. Box 700
FIN-65101 Vaasa, FI-65101
Finland
+358 6 3248541 (Phone)

Sami Vähämaa (Contact Author)

University of Vaasa ( email )

P.O. Box 700
Vaasa, FI-65101
Finland
+358 29 449 8455 (Phone)

HOME PAGE: http://www.uva.fi/~sami

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