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Central bank intervention and the volatility of foreign exchange rates: evidence from the options market

Author

Listed:
  • Catherine Bonser-Neal
  • Glenn Tanner

Abstract

This paper tests the effects of central bank intervention on the ex ante volatility of $/DM and $/Yen exchange rates. In contrast to previous research which employed GARCH estimates of conditional volatility, we estimate ex ante volatility using the implied volatilities of currency options prices. We also control for the effects of other macroeconomic announcements. We find little support for the hypothesis that central bank intervention decreased expected exchange rate volatility between 1985 and 1991. Federal Reserve intervention was generally associated with a positive change in exante $/DM and $/Yen volatility, or with no change. Perceived Bundesbank intervention did not alter $/DM ex ante volatility in any of the periods, while perceived Bank of Japan intervention was associated with positive changes in ex ante $/Yen volatility during the 1985-91 period as a whole and during the February 1987 to December 1989 post-Louvre Accord subperiod.

Suggested Citation

  • Catherine Bonser-Neal & Glenn Tanner, 1995. "Central bank intervention and the volatility of foreign exchange rates: evidence from the options market," Research Working Paper 95-04, Federal Reserve Bank of Kansas City.
    • Handle: RePEc:fip:fedkrw:95-04
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    Cited by:

    1. Gabriele Galati & Corrinne Ho, 2001. "Macroeconomic news and the euro/dollar exchange rate," BIS Working Papers 105, Bank for International Settlements.
    2. Fatum, Rasmus, 2000. "On the effectiveness of sterilized foreign exchange intervention," Working Paper Series 0010, European Central Bank.
    3. William Melick & Gabriele Galati, 1999. "Perceived central bank intervention and market expectations: an empirical study of the yen/dollar exchange rate, 1993 - 96," BIS Working Papers 77, Bank for International Settlements.

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