Central Bank Exchange Rate Interventions and Market Expectations: The Case of Mexico during the Financial Crisis 2008-2009

32 Pages Posted: 6 Sep 2011

See all articles by Guillermo Benavides

Guillermo Benavides

Banco de Mexico; Universidad del Valle de Mexico

Date Written: July 11, 2011

Abstract

The objective of this research paper is to analyze if exchange rate interventions that the Central Bank of Mexico had during the 2008-2009 financial crisis influenced the Mexican Peso-US Dollar exchange rate market expectations. Expectations are gauged by Risk-Neutral Densities (RNDs) extracted from option prices. The method used to estimate RNDs is the Volatility Function Technique proposed by Malz (1997). The results show that interventions caused changes in expectations around the date of the intervention. There is a common pattern of statistical significant decreases in exchange rate implied mean and variance immediately after the period of intervention. The higher implied moments decrease as well. There is also found a causality effect that runs in both directions, that is, between exchange rate expectations and Central Bank interventions.

Keywords: Exchange rate interventions, market expectations, Mexican Peso-USD Exchange Rate, Risk-Neutral Densities, Volatility Function Technique

JEL Classification: C14, E44, E58, F31

Suggested Citation

Benavides, Guillermo, Central Bank Exchange Rate Interventions and Market Expectations: The Case of Mexico during the Financial Crisis 2008-2009 (July 11, 2011). Available at SSRN: https://ssrn.com/abstract=1923101 or http://dx.doi.org/10.2139/ssrn.1923101

Guillermo Benavides (Contact Author)

Banco de Mexico ( email )

Cinco de Mayo # 2
Mexico DF, 06059
Mexico

Universidad del Valle de Mexico ( email )

Calzada de Tlalpan No. 3058. Santa Ursula Coapa
Distrito Federal, 29000
Mexico

HOME PAGE: http://ssrn.com/author=386155

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