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Central Bank Intervention and the Volatility of Foreign Exchange Rates: Evidence from the Options MarketCatherine Bonser-Neal |
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. Catherine Bonser-Neal is an economist at the Federal Reserve Bank of Kansas City. Glenn Tanner is a lecturer at the University of Washington. The authors wish to thank Warren Bailey, Wayne Ferson, Craig Hakkio, Kevin Harper, Owen Humpage, Avi Kamara, Rob Neal, Steve Pruitt, and Dick Sweeney. We also benefited from the comments of seminar participants at the Federal Reserve Bank of Kansas City, Indiana University, the University of Memphis, and the Federal Reserve System Committee on International Economic Analysis Meeting. The views expressed herein are solely those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Kansas City or the Federal Reserve System.Back to top RWP home |