Central Bank Intervention and Exchange Rate Volatility, its Continuous and Jump Components

FRB of St. Louis Working Paper No. 2006-031C

37 Pages Posted: 16 May 2006  

Michel A. R. Beine

University of Luxemburg; CESifo (Center for Economic Studies and Ifo Institute)

Jerome Lahaye

Facultés Universitaires Notre-Dame de la Paix (FUNDP); University of Namur; Catholic University of Louvain

Sébastien Laurent

French National Center for Scientific Research (CNRS) - Research Group in Quantitative Saving (GREQAM)

Christopher J. Neely

Federal Reserve Bank of St. Louis - Research Division

Franz C. Palm

University of Maastricht - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: February 2007

Abstract

We analyze the relationship between interventions and volatility at daily and intra-daily frequencies for the two major exchange rate markets. Using recent econometric methods to estimate realized volatility, we employ bipower variation to decompose this volatility into a continuously varying and jump component. Analysis of the timing and direction of jumps and interventions imply that coordinated interventions tend to cause few, but large jumps. Most coordinated operations explain, statistically, an increase in the persistent (continuous) part of exchange rate volatility. This correlation is even stronger on days with jumps.

Keywords: intervention, exchange rate, jumps, bi-power variation, volatility, central bank

JEL Classification: F31, F33, C34

Suggested Citation

Beine, Michel A. R. and Lahaye, Jerome and Laurent, Sébastien and Neely, Christopher J. and Palm, Franz C., Central Bank Intervention and Exchange Rate Volatility, its Continuous and Jump Components (February 2007). Available at SSRN: https://ssrn.com/abstract=901267 or http://dx.doi.org/10.2139/ssrn.901267

Michel A. R. Beine

University of Luxemburg ( email )

L-1511 Luxembourg
Luxembourg

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Jerome Lahaye

Facultés Universitaires Notre-Dame de la Paix (FUNDP) ( email )

Rempart de la Vierge, 8
Namur 5000
Belgium

University of Namur ( email )

8 rempart de la vierge
Namur, 5000
Belgium

Catholic University of Louvain ( email )

34 Voie du Roman Pays
B-1348 Louvain-la-Neuve, b-1348
Belgium

Sébastien Laurent

French National Center for Scientific Research (CNRS) - Research Group in Quantitative Saving (GREQAM) ( email )

Centre de la Vieille Charité
2, rue de la Charité
Marseille, 13002
France

Christopher J. Neely (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8568 (Phone)
314-444-8731 (Fax)

HOME PAGE: http://www.stls.frb.org/research/econ/cneely/

Franz C. Palm

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

University of Maastricht - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31-(0)43-3883833 (Phone)
+31-(0)43-3258535 (Fax)

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