Central Bank Intervention and Exchange Rate Volatility, Its Continuous and Jump Components

in International Journal of Finance and Economics (2007), 12(2), 201-223

We analyze the relationship between interventions and volatility at daily and intra-daily <br />frequencies for the two major exchange rate markets. Using recent econometric methods to <br />estimate ... [more ▼]

We analyze the relationship between interventions and volatility at daily and intra-daily <br />frequencies for the two major exchange rate markets. Using recent econometric methods to <br />estimate realized volatility, we employ bipower variation to decompose this volatility into a <br />continuously varying and jump component. Analysis of the timing and direction of jumps <br />and interventions imply that coordinated interventions tend to cause few, but large jumps. <br />Most coordinated operations explain, statistically, an increase in the persistent (continuous) <br />part of exchange rate volatility. This correlation is even stronger on days with jumps. [less ▲]