Foreign Exchange Interventions and Their Impact on Expectations: Evidence from the Usd/Ils Options Market

44 Pages Posted: 2 Jun 2022

See all articles by Markus Hertrich

Markus Hertrich

University of Basel - Center for Economic Science (WWZ) - Department of Finance; Deutsche Bundesbank

Daniel Nathan

Bank of Israel; University of Pennsylvania - Finance Department

Abstract

Using confidential daily data, we analyse how the intervention episode of the Bank of Israel (BOI) from 2013 to 2019 has affected the foreign value of the Israeli new shekel (ILS) and the expectations about its future value. We find that interventions amounting to US dollar (USD) 1 billion are on average associated with a depreciation of the ILS by 0.82%-0.85%, which is at the upper bound of the estimated impact in other studies. The (indirect) effect on the forward rate is smaller - the BOI's USD purchases have widened the negative deviation from covered interest parity. The higher moments of the risk-neutral probability distribution of future exchange rates proxied by the scaled price quotes of USD/ILS options, on the contrary, are unaffected. The USD purchases simply shift the whole distribution towards higher USD/ILS values. Crash risk, for instance, is unaffected. We also find that the USD/ILS options market anticipates intervention episodes and prices them in before they occur.

Keywords: Exchange rate, market expectations, central bank intervention, US dollar purchases, reaction function.

Suggested Citation

Hertrich, Markus and Nathan, Daniel, Foreign Exchange Interventions and Their Impact on Expectations: Evidence from the Usd/Ils Options Market. Available at SSRN: https://ssrn.com/abstract=4126039 or http://dx.doi.org/10.2139/ssrn.4126039

Markus Hertrich (Contact Author)

University of Basel - Center for Economic Science (WWZ) - Department of Finance ( email )

Peter Merian-Weg 6
Basel, 4052
Switzerland

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Daniel Nathan

Bank of Israel ( email )

P.O. Box 780
Jerusalem, 91907
Israel

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

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