Central bank interventions and jumps in double long memory models of daily exchange rates |
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Authors: | Michel Beine Sbastien Laurent |
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Institution: | a CADRE, Université de Lille II, Lille, France;b Université Libre de Bruxelles, DULBEA, 50 avenue F. Roosevelt, CP 145, Brussels 1050, Belgium;c Department of Economics, Université de Liège, Liège, Belgium;d CORE, Université Catholique de Louvain, Louvain-la-Neuve, Belgium;e Department of Quantitative Economics, Maastricht University, Maastricht, The Netherlands |
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Abstract: | In this paper, we estimate ARFIMA–FIGARCH models for the major exchange rates (against the US dollar) which have been subject to direct central bank interventions in the last decades. We show that the normality assumption is not adequate due to the occurrence of volatility outliers and its rejection is related to these interventions. Consequently, we rely on a normal mixture distribution that allows for endogenously determined jumps in the process governing the exchange rate dynamics. This distribution performs rather well and is found to be important for the estimation of the persistence of volatility shocks. Introducing a time-varying jump probability associated to central bank interventions, we find that the central bank interventions, conducted in either a coordinated or unilateral way, induce a jump in the process and tend to increase exchange rate volatility. |
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Keywords: | Exchange rate dynamics ARFIMA process Fractionally integrated GARCH Normal mixtures Central bank interventions |
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