Deviations from daily uncovered interest rate parity and the role of intervention

This paper considers the relationship between daily deviations from uncovered interest rate parity and US and German central bank intervention. The study uses daily overnight Eurocurrency deposit rates with a maturity time of 1 day, which exactly matches the sampling interval of the data. The intervention data are the official net daily purchases and sales of dollars vis-à-vis the German mark by the Federal Reserve System and the Bundesbank. The model uses FIGARCH innovations to represent the degree of long-term dependence in the volatility process. Some support is found for the intervention variables affecting the risk premium as predicted by theory. The impact of intervention in the 2 years immediately following the meltdown of the equity markets in October 1987 and Louvre Accord is particularly strong.