Are the Intraday Effects of Central Bank Intervention on Exchange Rate Spreads Asymmetric and State Dependent?
Research output: Working paper › Research
Standard
Are the Intraday Effects of Central Bank Intervention on Exchange Rate Spreads Asymmetric and State Dependent? / Fatum, Rasmus; Pedersen, Jesper; Sørensen, Peter Norman.
Department of Economics, University of Copenhagen, 2010.Research output: Working paper › Research
Harvard
APA
Vancouver
Author
Bibtex
}
RIS
TY - UNPB
T1 - Are the Intraday Effects of Central Bank Intervention on Exchange Rate Spreads Asymmetric and State Dependent?
AU - Fatum, Rasmus
AU - Pedersen, Jesper
AU - Sørensen, Peter Norman
N1 - JEL Classification: D53, E58, F31, G15
PY - 2010
Y1 - 2010
N2 - This paper investigates the intraday effects of unannounced foreign exchange intervention on bid-ask exchange rate spreads using official intraday intervention data provided by the Danish central bank. Our starting point is a simple theoretical model of the bid-ask spread which we use to formulate testable hypotheses regarding how unannounced intervention purchases and intervention sales influence the market asymmetrically. To test these hypotheses we estimate weighted least squares (WLS) time-series models of the intraday bid-ask spread. Our main result is that intervention purchases and sales both exert a significant influence on the exchange rate spread, but in opposite directions: intervention purchases of the smaller currency, on average, reduce the spread while intervention sales, on average, increase the spread. We also show that intervention only affects the exchange rate spread when the state of the market is not abnormally volatile. Our results are consistent with the notion that illiquidity arises when traders fear speculative pressure against the smaller currency and confirms the asymmetry hypothesis of our theoretical model.
AB - This paper investigates the intraday effects of unannounced foreign exchange intervention on bid-ask exchange rate spreads using official intraday intervention data provided by the Danish central bank. Our starting point is a simple theoretical model of the bid-ask spread which we use to formulate testable hypotheses regarding how unannounced intervention purchases and intervention sales influence the market asymmetrically. To test these hypotheses we estimate weighted least squares (WLS) time-series models of the intraday bid-ask spread. Our main result is that intervention purchases and sales both exert a significant influence on the exchange rate spread, but in opposite directions: intervention purchases of the smaller currency, on average, reduce the spread while intervention sales, on average, increase the spread. We also show that intervention only affects the exchange rate spread when the state of the market is not abnormally volatile. Our results are consistent with the notion that illiquidity arises when traders fear speculative pressure against the smaller currency and confirms the asymmetry hypothesis of our theoretical model.
KW - Faculty of Social Sciences
KW - foreign exchange intervention
KW - exchange rate spread
KW - intraday data
M3 - Working paper
BT - Are the Intraday Effects of Central Bank Intervention on Exchange Rate Spreads Asymmetric and State Dependent?
PB - Department of Economics, University of Copenhagen
ER -
ID: 21724670