Perceived Central Bank Intervention and Market Expectations: An Empirical Study of the Yen/Dollar Exchange Rate, 1993-96

31 Pages Posted: 13 Dec 2005

Date Written: October 1999

Abstract

This paper uses a new data set, based on Reuters news articles, to capture intervention that is perceived by FX traders and probability density functions (PDFs) estimated from option data to describe market expectations. We find that, between September 1993 and April 1996, traders viewed the Bank of Japan as responding mainly to deviations of the exchange rate from what they considered to be some implicit target levels. On the other hand, the Federal Reserve was viewed to have mainly intervened when market conditions seemed most conducive to a successful intervention. We find that perceived intervention had no statistically significant effect on the exchange rate level and on the skewness of the PDFs. We also present evidence that, on average, perceived intervention increased traders' uncertainty about future exchange rate movements.

Suggested Citation

Galati, Gabriele and Melick, William R., Perceived Central Bank Intervention and Market Expectations: An Empirical Study of the Yen/Dollar Exchange Rate, 1993-96 (October 1999). BIS Working Paper No. 77. Available at SSRN: https://ssrn.com/abstract=856286 or http://dx.doi.org/10.2139/ssrn.856286

Gabriele Galati (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

William R. Melick

Kenyon College ( email )

Gambier, OH 43022

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