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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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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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description	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.
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source	International Bibliography of the Social Sciences (IBSS); Elsevier ScienceDirect Freedom Collection 2023
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
title	Conditional covariances and direct central bank interventions in the foreign exchange markets
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