Realized Volatility as an Instrument to Official Intervention

João Barroso

Chapter 8 in Monetary Policy and Financial Stability in Latin America and the Caribbean, 2018, pp 259-281 from Centro de Estudios Monetarios Latinoamericanos, CEMLA

Abstract: This chapter proposes a novel orthogonality condition based on realized volatility that allows instrumental variable estimation of the effects of spot intervention in foreign exchange markets. We consider parametric and nonparametric instrumental variable estimation and propose a test based on the average treatment effect of intervention. We apply the method to a unique dataset for the BRL/USD market with full records of spot intervention and net order flow intermediated by the financial system. Overall the average effect of a one billion dollars sell or buy intervention is close to 0.51% depreciation or appreciation, respectively, estimated in the linear framework, which is therefore robust to nonlinear interactions. The estimates are a bit lower when controlling for derivative operations, which suggests the intervention policies (spot and swaps) are complementary.

Keywords: realized volatility; intervention; exchange rate; order flow; instrumental variable; nonparametric. (search for similar items in EconPapers)
JEL-codes: C26 C54 F31 (search for similar items in EconPapers)
Date: 2018
ISBN: 978-607-7734-89-5 (printed)
Note: Joint Research Program XIX Meeting of the Central Bank Researchers Network
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Related works:
Working Paper: Realized Volatility as an Instrument to Official Intervention (2014)
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