The impact of FX intervention on FX markets: a market microstructure analysis | Zendy

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The impact of FX intervention on FX markets: a market microstructure analysis

Author(s) -

Vitale Paolo

Publication year - 2011

Publication title -

international journal of finance and economics

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 0.505

H-Index - 39

eISSN - 1099-1158

pISSN - 1076-9307

DOI - 10.1002/ijfe.418

Subject(s) - market microstructure , foreign exchange market , foreign exchange , intervention (counseling) , exchange rate , economics , portfolio , normative , balance (ability) , market impact , monetary economics , econometrics , financial economics , order (exchange) , finance , medicine , philosophy , epistemology , psychiatry , physical medicine and rehabilitation

We formulate a market microstructure model of exchange determination we employ to investigate the impact of foreign exchange (FX) intervention on exchange rates and on FX market conditions. With our formulation we show: (i) how FX intervention influences exchange rates via both a portfolio‐balance and a signalling channel; and (ii) derive a series of testable implications which are coherent with a large body of empirical research. Our investigation also proposes some normative recommendations, as we show: (i) that in extreme circumstances large‐scale FX intervention can have destabilizing effects for the functioning of FX markets; and (ii) that the route chosen for the implementation of official intervention has important implications for its impact on exchange rates and on market conditions. Copyright © 2010 John Wiley & Sons, Ltd.

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