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Foreign Exchange Interventions and their Impact on Expectations: Evidence from the USD/ILS Options Market

Author

Listed:
  • Markus Hertrich

    (Deutsche Bundesbank)

  • Daniel Nathan

    (Bank of Israel)

Abstract

Using confidential daily data, we analyze how the intervention episode of the Bank of Israel (BOI) from 2013 to 2019 has affected the foreign value of the ILS and the expectations about its future value. We find that interventions amounting to USD 1 billion are on average associated with a depreciation of the USD/ILS and the Nominal Effective Exchange Rate (NEER) by 0.82%-0.85%, which is at the upper bound of the estimated impact in other studies. We stress that an intervention of USD 1 billion does not reflect the average daily intervention by the BOI and it serves as a benchmark to compare to other research papers in the field of FX interventions. The (indirect) effect on the forward rate is smaller - the BOI’s USD purchases have widened the negative deviation from covered interest parity. The higher moments of the risk-neutral probability distribution (RND) of future exchange rates extracted from USD/ILS options, on the contrary, are unaffected. The USD purchases simply shift the whole RND towards higher USD/ILS values. Crash risk, for instance, is unaffected. We also find that the USD/ILS options market anticipates intervention episodes and prices them in before they occur.

Suggested Citation

  • Markus Hertrich & Daniel Nathan, 2022. "Foreign Exchange Interventions and their Impact on Expectations: Evidence from the USD/ILS Options Market," Bank of Israel Working Papers 2022.10, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2022.10
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    References listed on IDEAS

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    More about this item

    Keywords

    Exchange rate; expectations; central bank intervention; Israeli new shekel; reaction function;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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