Systematic Intervention and Currency Risk Premia

Fratzscher, Marcel; Menkhoff, Lukas; Sarno, Lucio; Schmeling, Maik; Stoehr, Tobias

doi:10.2139/ssrn.3119907

Systematic Intervention and Currency Risk Premia

61 Pages Posted: 13 Feb 2018 Last revised: 24 Mar 2019

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: March 20, 2019

Abstract

Using data for the trades of 19 central banks intervening in currency markets, we show that stabilization policies by individual central banks lead to "systematic intervention" patterns. 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: Suggested Citation

Fratzscher, Marcel and Menkhoff, Lukas and Sarno, Lucio and Schmeling, Maik and Stoehr, Tobias, Systematic Intervention and Currency Risk Premia (March 20, 2019). Available at SSRN: https://ssrn.com/abstract=3119907 or http://dx.doi.org/10.2139/ssrn.3119907