Central Bank Interventions and Implied Exchange Rate Correlations
Posted: 16 Jan 2011
Date Written: December 1, 2009
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: Suggested Citation