Systematic Intervention and Currency Risk Premia

58 Pages Posted: 13 Feb 2018 Last revised: 4 May 2018

See all articles by Marcel Fratzscher

Marcel Fratzscher

DIW Berlin; Centre for Economic Policy Research (CEPR)

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin); Humboldt University of Berlin - Faculty of Economics

Lucio Sarno

City University London - Sir John Cass Business School; Centre for Economic Policy Research (CEPR)

Maik Schmeling

Goethe University Frankfurt - Department of Finance; Centre for Economic Policy Research (CEPR)

Tobias Stoehr

Kiel Institute for the World Economy; German Institute for Economic Research (DIW Berlin); IZA

Date Written: April 27, 2018

Abstract

Using data for the trades of 19 central banks intervening in currency markets, we show that leaning against the wind by individual central banks leads to "systematic intervention" in the aggregate central banking sector. This systematic intervention is driven by and impacts on the same factors that drive currency excess returns: carry, momentum, value, and a dollar factor. The sensitivity of an individual central bank's intervention to these factors differs markedly across countries, with developed countries making a profit from intervention and emerging markets incurring large losses.

Keywords: Foreign exchange intervention, Currency risk, Carry, Momentum, Value

JEL Classification: F31, G10, G12

Suggested Citation

Fratzscher, Marcel and Menkhoff, Lukas and Sarno, Lucio and Schmeling, Maik and Stoehr, Tobias, Systematic Intervention and Currency Risk Premia (April 27, 2018). Available at SSRN: https://ssrn.com/abstract=3119907 or http://dx.doi.org/10.2139/ssrn.3119907

Marcel Fratzscher

DIW Berlin ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Lukas Menkhoff

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Humboldt University of Berlin - Faculty of Economics ( email )

Spandauer Strasse 1
Berlin
Germany

Lucio Sarno (Contact Author)

City University London - Sir John Cass Business School ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Maik Schmeling

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

HOME PAGE: http://sites.google.com/site/maikschmeling/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Tobias Stoehr

Kiel Institute for the World Economy ( email )

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

IZA ( email )

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