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Journal of Financial Econometrics Advance Access published online on November 18, 2006
Journal of Financial Econometrics, doi:10.1093/jjfinec/nbl008
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Copyright © The Author 2006, Published by Oxford University Press.
Received February 21, 2006
Revised September 6, 2006
Accepted October 10, 2006

Article

The Impact of Central Bank FX Interventions on Currency Components

Michel Beine 1, Charles S. Bos 2 *, and Sébastien Laurent 3
     1 University of Luxembourg
2 Tinbergen Institute and Department of Econometrics & O.R., Vrije Universiteit Amsterdam, De Boelelaan 1105, 1081 HV Amsterdam, The Netherlands
3 University of Namur and CORE

* To whom correspondence should be addressed.
Charles S. Bos, E-mail: cbos{at}feweb.vu.nl


  Abstract

This article assesses the impact of official FOREX interventions of the three major central banks in terms of the dynamics of the currency components of the major exchange rates over the period 1989-2003. We identify the currency components of the mean and volatility processes of exchange rates using the framework developed recently by Bos and Shephard (2006). Our results show that, in general, concerted interventions tend to affect the dynamics of both currency components of the exchange rate. In contrast, unilateral interventions are found to primarily affect the currency of the central bank present in the market. Our findings also emphasize a role for interventions conducted by these central banks on other related FOREX markets.

Keywords: Central bank interventions, currency components, foreign exchange, Markov chain Monte Carlo, stochastic volatility, structural time series models.

This article has benefited from useful comments and suggestions of V. Bodart, B. Candelon, G. Chortareas, E. Girardin, C. Neely, G. Prat, two referees, and from participants of conferences in Aarhus, New York, Luxembourg, Strasbourg and Maastricht. Of course, the usual disclaimer applies.


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