Conditional covariances and direct central bank interventions in the foreign exchange markets

In this paper, we investigate the effects of central bank interventions (CBIs) on the ex post correlation and covariance of exchange rates. Using a multivariate GARCH model with time-varying conditional covariances, we estimate the effects of CBIs on both the variances and covariance between the yen...

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Bibliographic Details
Published in:Journal of banking & finance 2004-06, Vol.28 (6), p.1385-1411
Main Author: Beine, Michel
Format: Article
Language:English
Subjects:
Banking
Central bank interventions
Central banks
Conditional correlations
Correlation analysis
Covariance
Economic policy
Exchange market
Exchange rates
Finance
Financial assets
Foreign exchange
Foreign exchange markets
Foreign exchange rates
Intervention
Manycountries
Multivariate GARCH
Portfolio management
Prices
Studies
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Summary:In this paper, we investigate the effects of central bank interventions (CBIs) on the ex post correlation and covariance of exchange rates. Using a multivariate GARCH model with time-varying conditional covariances, we estimate the effects of CBIs on both the variances and covariance between the yen and the deutsche mark (the Euro) in terms of the US dollar. Our results suggest that coordinated CBIs not only tend to increase the volatility of exchange rates but also explain a significant amount of the covariance between the major currencies. We show that this result can be useful for short-run currency portfolio management.
ISSN:0378-4266
1872-6372
DOI:10.1016/S0378-4266(03)00124-9