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An Empirical Examination of the Relationship Between Central Bank Intervention and Exchange Rate Volatility: Some Australian Evidence
Author(s) -
McKenzie Michael
Publication year - 2004
Publication title -
australian economic papers
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.351
H-Index - 15
eISSN - 1467-8454
pISSN - 0004-900X
DOI - 10.1111/j.1467-8454.2004.00216.x
Subject(s) - volatility (finance) , autoregressive conditional heteroskedasticity , economics , foreign exchange market , economic interventionism , exchange rate , monetary economics , empirical evidence , conditional variance , econometrics , financial economics , intervention (counseling) , ordered probit , psychology , philosophy , epistemology , psychiatry , politics , law , political science
Arguably, market stability is one of the primary reasons behind government intervention in the foreign exchange market. Whether or not the authorities achieve this goal is an empirical matter and testing of this issue is made difficult by the fact that government intervention and exchange rate volatility may be jointly determined. In this paper, the extent to which volatility drives intervention is considered using PROBIT analysis. The results suggest that while support for the hypothesis exists, volatility on its own does not to provide enough information to allow us to accurately forecast government intervention. A modified GARCH model is then tested which incorporates the impact of government intervention in the mean and conditional variance equation. The evidence presented suggest that the dynamics of market are different on the days where the central bank is active in the market.