مداخلات بانک مرکزی و همبستگی نرخ ارز ضمنی

This paper examines the effects of the foreign exchange market interventions by the Bank of Japan on the ex ante correlations between the JPY/USD, EUR/USD, and GBP/USD exchange rates. The correlation estimates used in the analysis are derived from the market prices of OTC currency options. The results show that central bank interventions significantly affect the market expectations about future exchange rate co-movements. In particular, we find that interventions tend to temporarily increase the ex ante correlations among the major exchange rates. However, our results also suggest that intervention episodes are associated with lower-than-average levels of exchange rate correlations.

The debate on whether central banks can affect exchange rate dynamics with interventions has stimulated a large body of literature over the last ten years (for surveys, see e.g. Schwartz, 2000, Sarno and Taylor, 2001 and Galati et al., 2005). Although monetary authorities seem to view intervention as an effective instrument of exchange rate policy (Neely, 2000), there is widespread skepticism among academics about the effectiveness of interventions in achieving the alleged objectives of either changing the level of an exchange rate or reducing its volatility.2 The empirical evidence on the effects of interventions on exchange rate dynamics is mixed. Several studies find that interventions affect the level of the exchange rate (e.g., Fatum and Hutchison, 2003, Fatum and Hutchison, 2006, Chaboud and Humpage, 2005, Kearns and Rigobon, 2005, Fratzscher, 2006 and Fatum, 2008) and may reduce market uncertainty (e.g., Kim et al., 2000, Beine et al., 2003 and Hillebrand et al., 2009).3 However, there is also considerable evidence suggesting that interventions are not particularly effective in affecting exchange rate movements (e.g., Baillie and Osterberg, 1997, Aguilar and Nydahl, 2000, Morana and Beltratti, 2000 and Brandner et al., 2006) nor market expectations regarding future exchange rate developments (e.g., Rogers and Siklos, 2003 and Galati et al., 2005). Furthermore, instead of stabilizing exchange rates, interventions are often found to increase volatility in the foreign exchange markets (Bonser-Neal and Tanner, 1996, Beine and Laurent, 2003, Frenkel et al., 2005 and Dominguez, 2006). While no consensus has yet emerged, the previous studies, in general, suggest that interventions may be effective in affecting exchange rate dynamics, but not necessarily in achieving the objectives that central banks pursuit. In this paper, we take an alternative approach to examine the effects of central bank interventions on exchange rates. Specifically, rather than assessing the impact of interventions on the dynamics of a given spot exchange rate, we focus on the co- movements of exchange rates around interventions. Assuming that the triangular parity condition holds among a triplet of currencies, an effective intervention should not only affect the exchange rate in which the intervention is conducted, but also the cross-dynamics among the exchange rate triplet. Hence, to address whether central bank attempts to affect the dynamics of a particular exchange rate induce changes in the cross-dynamics of exchange rates, we examine the effects of the official Bank of Japan (BoJ) yen-selling interventions on the ex ante correlations between the major exchange rates.4 Our analysis is based on the ex ante correlation estimates derived from the market prices of currency options. Given the vast empirical work on central bank interventions, it is rather surprising that the impact of interventions on the co- movements of exchange rates has so far been largely neglected in the literature.5 Our idea to focus on the exchange rate co- movements is not, however, completely novel. In a recent paper, Beine (2004) examines the effects of central bank interventions on the ex post exchange rate correlations. Using multivariate GARCH modeling, Beine (2004) shows that interventions not only affect exchange rate volatility but also tend to increase the conditional correlations among exchange rates. In contrast to Beine (2004), we use ex ante exchange rate correlation estimates extracted from the prices of currency options.6 These ex ante correlations implied by option prices may be regarded as the market expectation of the degree of future co- movements between two exchange rates over the remaining life of the option contracts. Given that central bank interventions are often considered to affect exchange rate dynamics by changing market participants’ expectations, it is of interest to examine whether the expected exchange rate co-movements are affected by interventions.7 The potential intervention induced changes in market expectations should be immediately reflected in option prices, and thus, also in implied correlations. Hence, the use of option-implied correlations, instead of ex post correlation estimates, may provide new insights about the effects of central bank interventions on exchange rate dynamics. Previously, a number of papers have used option-implied volatilities and probability distributions to examine the behavior of market expectations around central bank interventions. In general, these studies find that implied volatilities in the foreign exchange markets are increased by interventions (see e.g., Bonser-Neal and Tanner, 1996, Dominguez, 1998, Frenkel et al., 2005 and Fratzscher, 2006), while the higher-order moments of expected exchange rate distributions appear to be virtually unaffected (Rogers and Siklos, 2003 and Galati et al., 2005). Some studies, however, report evidence for stabilizing effects of interventions over certain periods (see e.g., Dominguez, 1998 and Aguilar and Nydahl, 2000), and Castren (2004), Morel and Teiletche (2008), and Gnabo and Teiletche (2009) document systematic changes in implied probability distributions around central bank actions. In this paper, we attempt to extend the above literature by examining the effects of interventions on option-implied exchange rate correlations. Our empirical findings demonstrate that central bank interventions significantly affect the market expectations about future exchange rate co-movements. In particular, the results show that implied exchange rate correlations increase on the first day of a period of successive intervention days. Furthermore, we find that the size of the intervention, as measured by the BoJ's daily net purchase of U.S. dollars against the yen, is positively related to the change in implied correlations. However, this positive effect of interventions on implied correlations does not continue after the first intervention day. Instead, we find that implied correlations typically decrease during the remaining days of an intervention episode. Finally, our findings suggest that the ex ante exchange rate correlations are somewhat lower during the intervention episodes than during periods with no central bank activity. The results reported in this paper may have important implications for financial market practitioners and monetary authorities. Knowledge of the potential effects of interventions on exchange rate correlations may be useful for formulation and implementation of investment and risk management strategies.8 From the viewpoint of monetary authorities, the documented effects of interventions on the expected co-movements of exchange rates may be important to consider for the purposes of policy assessment. The remainder of this paper is organized as follows. Section 2 presents the methodology used to extract implied exchange rate correlations from option prices. Section 3 presents the OTC currency option data used in the analysis and also describes the data on the official Bank of Japan yen-selling interventions. Section 4 reports the empirical findings on the effects of central bank interventions on option-implied exchange rate correlations. Finally, Section 5 provides concluding remarks.

Central bank interventions in the foreign exchange markets are a controversial tool of exchange rate policy. Although monetary authorities seem to view intervention as an effective instrument of exchange rate policy, the empirical evidence on effects of interventions is mixed. In this paper, we examine the effects of central bank interventions from a novel perspective by focusing on the co-movements of exchange rates around interventions. Assuming that the triangular parity condition holds among a triplet of currencies, an effective intervention should not only affect the exchange rate in which the intervention is conducted, but also the cross-dynamics among the exchange rate triplet. Hence, to address whether central bank interventions induce changes in the cross-dynamics of exchange rates, we examine the effects of the official Bank of Japan (BoJ) yen-selling interventions on the ex ante correlations between the major exchange rates. The ex ante correlation estimates used in the analysis are extracted from the prices of OTC currency options. Our empirical findings demonstrate that central bank interventions significantly affect the market expectations regarding future exchange rate co-movements. In particular, interventions are found to temporarily increase the option-implied correlations among the major exchange rates. Implied correlations increase significantly on the first day of a period of successive intervention days, and then decline during the remaining days of the intervention episode. We also find that the intervention periods are, on average, associated with lower-than-average levels of implied exchange rate correlations. In general, the findings reported in this paper indicate that central bank interventions are effective, at least in the short-run, in affecting market expectations about future exchange rate dynamics.