Estimating the COP Exchange Rate Volatility Smile and the Market Effect of Central Bank Interventions: A CHARN Approach

Juan Julio, Norberto Rodríguez N. () and Hector Zarate-Solano

Borradores de Economia from Banco de la Republica de Colombia

Abstract: In this paper we estimated a volatility model for COP/US under two different samples, one containing the information before the “discretional interventions” started, and the other using the whole sample. We use a nonparametric approach to estimate the mean and “volatility smile” return functions using daily data. For the pre-interventions sample, we found a nonlinear expected return function and, surprisingly, a non-symmetric “volatility smile”. These lack of linearity and symmetry are related to absolute returns above 1,5% and 1,0%, respectively. We also found that the “discretional interventions” did not shift the mean response function, but moved the expected returns along the line towards the required levels. In contrast, the “volatility smile” tends to increase in a non-symmetric way after accounting for “discretional interventions”. The Sep/29/2004 announcement does not seem to have had any effect on the expected conditional mean or variance functions, but the Dec/17/2004 announcement seems to be related to non-symmetric effects on the volatility smile. We concluded that the announcement of discretional intervention by the monetary authority was more efficient when time and amount were unannounced.

Keywords: Volatility Smile; Exchange Rate Risk; Nonparametric Estimation; Central Bank Intervention. (search for similar items in EconPapers)
JEL-codes: C14 C22 E44 E58 F31 (search for similar items in EconPapers)
Date: 2005-08
New Economics Papers: this item is included in nep-mac and nep-mon
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https://doi.org/10.32468/be.347 (application/pdf)

Related works:
Working Paper: Estimating the COP Exchange Rate Volatility Smile and the Market Effect of Central Bank Interventions: A CHARN Approach (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:bdr:borrec:347

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