Interventions in the Yen–dollar spot market: A story of price,volatility and volume |
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| Institution: | 1. School of Banking and Finance, The University of New South Wales, UNSW, Sydney, NSW 2052, Australia;2. Department of Economics, The University of Sydney, NSW 2006, Australia;1. Faculty of Economic and Social Sciences and Solvay Business School, Vrije Universiteit Brussel, Belgium;2. Department of Economics, KU Leuven, Belgium;3. Leuven School of Business and Economics, KU Leuven, Belgium;1. Finance Discipline Group, UTS Business School, University of Technology, Sydney;2. San Jose State University, San Jose, CA, United States;1. University of California San Diego, San Diego, California;2. Robarts Clinical Trials, Robarts Research Institute, Western University, London, Ontario, Canada;3. Department of Medicine, Western University, London, Ontario, Canada;4. Department of Gastroenterology, Academic Medical Center, Amsterdam, The Netherlands;2. Department of Surgery, Brigham and Women?s Hospital, Boston, Massachusetts;3. Department of Surgery, Southern Illinois University School of Medicine, Springfield, Illinois;1. Mathematical Institute, Andrew Wiles Building, University of Oxford, Woodstock Road, Oxford, OX2 6GG, United Kingdom;2. Cheriton School of Computer Science, University of Waterloo, Waterloo, ON N2L 3G1, Canada |
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| Abstract: | We test the effectiveness of Bank of Japan (BOJ)’s foreign exchange interventions on conditional first and second moments of exchange rate returns and traded volumes, using a bivariate EGARCH model of the Yen/USD market from 5-13-1991 to 3-16-2004. We also estimate a friction model of BOJ’s intervention reaction function based on reducing short-term market disorderliness and supplementing domestic monetary policy. Important finding of this study are that: (i) we find ineffectiveness of BOJ interventions in influencing exchange rate trends pre-1995, in general, but effectiveness post-1995; (ii) FED intervention amplified the effectiveness of the BOJ transactions; (iii) interventions amplified market volatility and volumes through a ‘learning by trading’ process; (iv) BOJ’s interventions were based on ‘leaning against the wind’ motivations on the exchange rate trend and volumes; and (v) BOJ interventions were vigorously used in support of domestic monetary policy objectives post-1995. Though some of our findings confirm recent studies, our analysis goes deeper to provide new findings with important implications for central banks and foreign exchange market participants. |
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