Are the Intraday Effects of Central Bank Intervention on Exchange Rate Spreads Asymmetric and State Dependent?

Publikation: Working paper › Forskning

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.

Publikation: Working paper › Forskning

Harvard

Fatum, R, Pedersen, J & Sørensen, PN 2010 'Are the Intraday Effects of Central Bank Intervention on Exchange Rate Spreads Asymmetric and State Dependent?' Department of Economics, University of Copenhagen.

APA

Fatum, R., Pedersen, J., & Sørensen, P. N. (2010). Are the Intraday Effects of Central Bank Intervention on Exchange Rate Spreads Asymmetric and State Dependent? Department of Economics, University of Copenhagen.

Vancouver

Fatum R, Pedersen J, Sørensen PN. Are the Intraday Effects of Central Bank Intervention on Exchange Rate Spreads Asymmetric and State Dependent? Department of Economics, University of Copenhagen. 2010.

Author

Fatum, Rasmus ; Pedersen, Jesper ; Sørensen, Peter Norman. / Are the Intraday Effects of Central Bank Intervention on Exchange Rate Spreads Asymmetric and State Dependent?. Department of Economics, University of Copenhagen, 2010.

Bibtex

@techreport{7bb45830b59711df825b000ea68e967b,
title = "Are the Intraday Effects of Central Bank Intervention on Exchange Rate Spreads Asymmetric and State Dependent?",
abstract = "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.",
keywords = "Faculty of Social Sciences, foreign exchange intervention, exchange rate spread, intraday data",
author = "Rasmus Fatum and Jesper Pedersen and S{\o}rensen, {Peter Norman}",
note = "JEL Classification: D53, E58, F31, G15",
year = "2010",
language = "English",
publisher = "Department of Economics, University of Copenhagen",
address = "Denmark",
type = "WorkingPaper",
institution = "Department of Economics, University of Copenhagen",

}

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