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Realized Volatility as an Instrument to Official Intervention

João Barroso ()

No 363, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: This paper 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 1 billion USD sell or buy interventions are close to the 0.51% depreciation or appreciation, respectively, estimated in the linear framework, which is therefore robust to nonlinear interactions. The estimates are a bit lower controlling for derivative operations, which suggests the intervention policies (spot and swaps) are complementary

Date: 2014-09
New Economics Papers: this item is included in nep-ecm
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Chapter: Realized Volatility as an Instrument to Official Intervention (2018) Downloads
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