The effects of Japanese foreign exchange market interventions on the yen/U.S. dollar exchange rate volatility

In previous empirical work, the link between the interventions of the Bank of Japan (BoJ) and exchange rate volatility has mainly been analyzed by using data on press reports of BoJ interventions. We use official intervention data for the period 1993–2000 that were released only recently by the BoJ. We find a positive link between the interventions of the BoJ and the volatility of the yen/U.S. dollar exchange rate. We also find that those BoJ interventions that were not reported in the financial press were positively correlated with exchange rate volatility.     

Investigating Intraday Interdependence Between Gold,Silver and Three Major Currencies: the Euro,British Pound and Japanese Yen

In this study, the interrelationship between major exchange rate returns (namely EUR/USD, GBP/USD, JPY/USD) and precious metal returns (gold and silver) is examined using a vector autoregressive model in a multivariate asymmetric GARCH framework on the intraday frequency. Our findings indicate a unidirectional volatility transmission from the majority of our currencies (EUR/USD, GBP/USD) to precious metals. The sluggish response of silver volatility to currency volatility shocks permits implementation of intraday profitable strategies, providing implications against market efficiency when analyzing intraday data. In the case of the British pound and Japanese yen, a volatility shock affects silver volatility more than gold volatility. Crisis events such as the Greek default and US credit rating downgrade reduce significantly the correlation of EUR/USD and gold/silver. The covariance between EUR/USD and silver increases after a volatility shock in EUR/USD. The same happens with JPY/USD and silver. These findings are important for portfolio managers and monetary authorities.     

Volatility spillovers and determinants of contagion: Exchange rate and equity markets during crises

We study the hourly volatility spillover between the equity markets of New York (DJI), London (FTSE 100) and Tokyo (N225) and their exchange rates (USD, EUR, GBP and JPY) for the period of 2001 through 2013 covering the non-crises period, the global financial crisis and the euro debt crisis. First, we find a general increase in spillover between the equity and exchange rate markets during the crisis periods. Second, pure contagion (attributable to irrational investors’ behavior) and fundamental contagion (measured by macroeconomic fundamentals) explains the increased spillover between the FTSE 100, N225 to the DJI during the global financial crisis and from the exchange rate markets to the DJI during the euro debt crisis.     

The Effects of US Macroeconomic Surprises on the Intraday Movements of Foreign Exchange Rates: Cases of USD-EUR and USD-JPY Exchange Rates

This paper characterizes the intraday dynamics of the high frequency US Dollar (USD)–Euro (EUR) and US Dollar (USD)–Japanese Yen (JPY) foreign exchange rates that have been subject to macroeconomic fundamentals. Even though the FIGARCH model with a normality assumption is found to be a good starting point, it appears to be inappropriate to represent the underlying movements of the high frequency returns due to the occurrences of jumps. Hence, this paper relies on the FIGARCH model with the mixture distribution that allows for the time-varying jumps that are determined by the US macroeconomic surprises. This paper generally finds that the US macroeconomic surprises are closely related to the intraday movements in the volatility process of the high frequency returns process through the jumps. In particular, the US macroeconomic surprises appear to affect the movements in the volatility process of the foreign exchange rates asymmetrically depending on the signs of the surprises and spuriously increasing the long memory persistence in the volatility process due to the jumps.     

Modelling the impact of central bank intervention on exchange rate volatility under inflation targeting

This article empirically investigates the effect of central bank’s foreign exchange interventions on the level and volatility of the Uganda shilling/US dollar exchange rate (UGX/USD) under an inflation-targeting regime. Utilizing daily data spanning the period 1 September 2005, to 31 December 2015, we estimate a foreign exchange intervention model within a GARCH theoretic framework. Empirical results indicate that foreign exchange interventions have had mixed impact on the volatility of the exchange rate. We find that inflation targeting is capable of curbing temporary exchange rate shocks. Empirical results indicate that while order flow is capable of reducing exchange rate volatility, an increase in the operating target rate, the 7-day interbank rate tends to exacerbate exchange rate volatility. Our empirical results are robust to alternative model specifications. We argue that inflation targeting is an effective monetary policy tool for curbing exchange rate volatility.     

Central bank interventions in a dollarized economy: managed floating versus inflation targeting

Effects of interventions by the Banco Central de Reserva del Peru (BCRP) on the sol/USD exchange rate are studied. The BCRP is currently committed to following an inflation-targeting (IT) regime to intervene in the foreign exchange market only to reduce exchange-rate volatility and during specific segments of the day and to make these interventions public information. We find that interventions in the foreign exchange market by the BCRP have been effective in moving the sol/USD in the intended direction during both the past managed floating regime and the current IT regime. Interventions have, however, increased the volatility of the sol/USD, and this increase has continued very strongly under the IT regime. A conclusion is that the BCRP might not yet have gained a sufficiently strong reputation to effectively reduce the exchange-rate volatility.     

Bi‐currency versus Single‐currency Targeting: Lessons from the Russian Experience

This paper examines how the 2005 shift in Russian exchange rate policy from US dollar (USD) single‐currency to USD–EUR (euro) bi‐currency targeting has impacted domestic interest rates. The finding show that this policy shift has disconnected Russian interest rates from US dollar‐denominated interest rates, while instead linking them to a synthetic interest rate composed of USD and EUR rates at the same proportion as that of these two currencies in the currency basket against which the ruble's exchange rate is set. The Russian experience shows that while the adoption of bi‐currency targeting may help ensure that domestic interest rates are less dependent on the monetary cycle of a single country, these rates are instead likely to reflect financial developments in all countries whose currencies are included in the currency basket. This insight is likely to be relevant for other countries that pursue basket‐targeting policies.     

Intraweek and intraday trade anomalies: evidence from FOREX market

In this article, we search for the evidence of intraweek and intraday anomalies on the spot foreign exchange (FOREX) market. Having in mind the international scope of this market, empirical evidence against market efficiency (i.e. market anomalies) will have important consequences for the substantial number of FOREX investors all around the globe. We explore intraweek, intraday and interaction between days and hour trade anomalies on the FOREX market over the period of 10 years using hourly time-series data of Euro and US Dollar (EUR/USD) exchange rate on Swiss FOREX market from 1 January 2004 to 11 January 2014. We compare by analysis of variance test all pairs of mean returns on a daily, hourly and daily/hourly basis. t-Test is used to test whether intraday returns are significantly different from zero. We employ Tukey’s honestly significant difference test to explore which intraday pairs of hourly mean returns are significantly greater than zero. We find that intraday and interaction between day and hour anomalies are present in trading EUR/USD on the spot FOREX market over the period of 10 years. The best arbitrage opportunity is evidenced on Fridays, when selling USD and buying EUR at 00:00 and selling EUR and buying USD at 03:00 the same day.     

Official central bank interventions and exchange rate volatility: Evidence from a regime-switching analysis

In this paper, we investigate the effect of central bank interventions on the weekly returns and volatility of the DEM/USD and YEN/USD exchange rate returns. In contrast with previous analyses, we allow for regime-dependent specifications and investigate whether official interventions can explain the observed volatility regime switches. It is found that, depending on the prevailing volatility level, coordinated central bank interventions can lead to either a stabilizing or a destabilizing effect. Our results lead us to challenge the usual view that such interventions always imply increases in volatility.     

The Impact of Monetary Surprises on Australian Financial Futures Markets: An Insight into Cash Rate Target Announcements

This paper investigates the impact of unanticipated Australian monetary policy changes on AUD/USD exchange rate futures, and 3‐year and 10‐year Australian Treasury bond futures, during the period from January 1997 to April 2010. Our study contributes to the literature by using both the 30‐day and the 90‐day bank accepted bill (BAB) rates to disentangle the unexpected surprise component of monetary policy changes from overall cash rate target changes in the Australian money market, and by concurrently modelling the effects of monetary surprises and other key macroeconomic announcements in Australia. The empirical results suggest that the 30‐day BAB rate is the best proxy for the expected monetary policy actions. We find that the effect of monetary surprises on the volatility of the 3‐ and 10‐year bond future instruments is significant and persistent. We have also documented a strong monetary policy effect on the mean returns of the exchange rate futures, indicating that unexpected monetary policy adjustments have a significant impact on the level of the exchange rate movements rather than on the volatility of the FX futures market.     

Tobin Tax and Volatility: A Threshold Quantile Autoregressive Regression Framework

From an original data set on the euro–dollar and on the won–dollar currency pairs (2008–2010), we conduct a threshold quantile autoregressive model to explain the role of a Tobin tax (TT) on the exchange rate volatility, taking into account two types of nonlinearity (regimes and quantiles). We find evidence that the impact of a TT would not be monotonic. A TT may be a good instrument to stabilize foreign exchange volatility only in normal times and/or in efficient markets. In contrast, a TT could be counterproductive in turbulent periods by increasing the volatility. In addition, by comparing a major currency pair (euro/dollar) and a minor currency pair (won/dollar), it appears that the potential stabilizing effect of a TT would be more clear‐cut in the low volatility regime of a major currency pair, similar to the euro/dollar. Our results do not corroborate the previous studies that derived a monotonic and positive impact of a TT on volatility.     

Market efficiency broadcasted live: ECB code words and euro exchange rates

This paper examines the impact of the European Central Bank (ECB) monetary policy on euro exchange rate returns using an event study with intraday data for five currencies (the euro exchange rate versus the US dollar, the British pound, the Canadian dollar, the Swiss franc, and the Japanese yen). I construct two indicators of news about monetary policy stemming separately from policy decisions and the press conference. Estimation results show that the surprise component of communication has highly statistically significant effects on exchange rates, whereas the response of euro exchange rates to the unanticipated change in the policy rate is more muted. I also estimate the financial market impact on euro exchange rates of US, European and German macroeconomic news, and I show that the impact of the ECB press conference is economically important. The process of fully incorporating the ECB news shock takes about 1 h, and thus this result suggests that the whole press conference (both the Introductory Statement and the Q&A part) provides valuable information to market participants.     

Exchange rate uncertainty and import prices in the euro area

This paper analyzes the effects of exchange rate uncertainty on the pricing behavior of import firms in the euro area. Uncertainty is measured via the volatility of the structural shocks to the exchange rate in a nonlinear vector‐autoregressive model framework and is an important determinant of import prices. An increase in exchange rate uncertainty is associated with a fall in prices on average, which suggests that the exchange rate risk is borne by the importers. Controlling for the origin of imports (within or outside the euro area) is important for assessing the impact of exchange rate movements on prices.     

Exchange Rate Pass‐Through And The Welfare Effects Of The Euro*

This article explores the implications of the European single currency within a simple sticky price intertemporal model. We focus on the question of how the euro may change the sensitivity of consumer prices in Europe to exchange‐rate changes. Our central conjecture is that the acceptance of the euro will lead European prices to become more insulated from exchange‐rate volatility. We find that this affects both the volatility and levels of macroeconomic aggregates in both the U.S. and Europe. We find that European welfare is enhanced, and the U.S. shares in Europe's good fortune.     

Expectation formation in the foreign exchange market: a time-varying heterogeneity approach using survey data

Using Consensus Economics survey data on JPY/USD and GBP/USD exchange rate expectations for the 3- and 12-month horizons over the period November 1989–December 2012, we first show that expectations fail the conventional tests of unbiasedness and do not exhibit a learning process towards rationality. Our approach is consistent with the economically rational expectations theory (Feige and Pearce, 1976), which states that information costs and agents’ aversion to misestimating future exchange rates determine the optimal amounts of information on which they base their expectations. The time variability of the cost/aversion ratios justifies at the aggregate level a representation of expectations as a linear combination of the traditional extrapolative, adaptive and regressive processes augmented by a forward market component, whose parameters are allowed to change over time. This mixed expectation model with unstable heterogeneity is validated by our Kalman filter estimation results for the two currencies and the two horizons considered. Although the relative importance of the ‘fundamentalists’ (‘chartists’) is found to increase (decrease) with the time-horizon, chartist behaviour appears to dominate fundamentalist behaviour for both horizons. Central bank intervention is then effective in stabilizing the foreign exchange markets if it encourages fundamentalist activity.     

Nonlinear exchange rate dynamics under stochastic official intervention

Many studies employ non-linear models to explain or forecast the exchange rate and find their superiority. This article builds an exchange rate model of managed float under conditional official intervention. In the model, the government minimizes social loss through a trade-off between targeting the exchange rate and lowering intervention costs. We obtain an endogenous threshold model and derive an analytical solution of the exchange rate stochastic interventions. The implication of a managed float causing a lower volatility of the exchange rate has been found by past empirical studies. Our model provides not only a justification for the central banks' conditional interventions but also a rationale for the use of regime-switching models of two states (intervention vs. non-intervention) in the empirical studies of exchange rates.     

Autoregressive conditional durations: An application to the Surinamese dollar versus the US dollar exchange rate

The parallel market nominal exchange rate of the United States dollar vis-à-vis the Surinamese dollar (USD/SRD) exhibited periods of severe volatility which were often followed by episodes of stability, usually at a cost of sharp depreciations. This study seeks to model this exchange rate using autoregressive conditional duration models. These models are suitable for modelling events occurring with irregular intervals. Exchange rates in developing countries have distinct features compared to exchange rates in countries with well-established and accessible financial markets. A key feature is that for these developing countries, exchange rates only occasionally experience jumps. Our findings suggest that past exchange rate changes appear to be a significant driver of future exchange rate jumps. Furthermore, our results show that money, international reserves, and commodity prices can explain jumps in the market USD/SRD exchange rate.     

Interaction between oil and US dollar exchange rate: nonlinear causality,time-varying influence and structural breaks in volatility

This article examines the nonlinear Granger causality and time-varying influence between crude oil prices and the US dollar (USD) exchange rate using the Hiemstra and Jones (HP) test, the Diks and Panchenko (DP) test and the time-varying parameter structural vector autoregression model. By applying the iterated cumulative sums of squares (ICSS) algorithm and the DCC-GARCH model, the effects of structural breaks in volatility of the two markets are also investigated. The empirical analysis indicates that, first, crude oil prices are the nonlinear Granger-cause of the USD exchange rate, but not vice versa. Second, the USD exchange rate exerts a stronger and more stable negative influence on crude oil prices in the short term, and the influence gradually weakens after 2012. Finally, ignoring structural breaks can increase the negative volatility correlation between the oil and USD exchange rate markets, which is particularly remarkable during the financial crisis.     

真实汇率与真实利率差异——基于人民币真实汇率的实证研究

本文详细考察了人民币对美元、日元、港币和欧元的双边真实汇率、真实利率差异与进出口之间的统计关系，结果发现：（1）人民币真实汇率与真实利率差异间不存在显著且稳定的统计关系；（2）人民币真实汇率具有较强的“自回归”性，并且存在比较明显的非线性动态调整特征。因此，研究人民币真实汇率自身的特定生成机制可能更具有重要意义。     

MODEL UNCERTAINTY AND EXCHANGE RATE VOLATILITY*

This article proposes an explanation for shifts in the volatility of exchange‐rate returns. Agents are uncertain about the true data generating model and deal with this uncertainty by making inference on the models and their parameters' approach, I call model learning. Model learning may lead agents to focus excessively on a subset of fundamental variables. Consequently, exchange‐rate volatility is determined by the dynamics of these fundamentals and changes as agents alter models. I investigate the empirical relevance of model learning and find that the change in volatility of GBP/USD in 1993 was triggered by a shift between models.