Signaling Effects of Foreign Exchange Interventions and Expectation Heterogeneity among Traders

Kentaro Iwatsubo, 健太郎 岩壷, ケンタロウ イワツボ, Junko Shimizu, 順子 清水 and ジュンコ シミズ
Authors registered in the RePEc Author Service: Yupana Wiwattanakantang ()

No 2005-18, CEI Working Paper Series from Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University

Abstract: This paper explores whether official intervention signaling effects on short-run exchange rate movements depend on market conditions. We find evidence that announced interventions significantly affect the level and reduce the volatility of the yen/dollar rate when traders' expectations of future exchange rates are relatively heterogeneous. To compensate for the lack of daily exchange rate expectation survey data, we use implied volatility as a proxy since these are highly correlated. These results are consistent with predictions from the market microstructure models with asymmetric information across agents and the signaling hypothesis of foreign exchange interventions. Our findings indicate that the efficacy of intervention hinges not only on the firmness of signals but also on the degree of expectation heterogeneity among traders.

Keywords: Foreign exchange intervention; Announcements; Expectation heterogeneity (search for similar items in EconPapers)
JEL-codes: F31 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2006-03
Note: First draft: August 18, 2004; This version: October 27, 2005
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Persistent link: https://EconPapers.repec.org/RePEc:hit:hitcei:2005-18

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