مداخله بانک مرکزی در نوسانات نرخ ارز: مدارک و شواهد بر گرفته شده از نوسانات محسوس در کشور ژاپن

This paper presents new empirical evidence on the effectiveness of Bank of Japan's foreign exchange interventions on the daily realized volatility of USD/JPY exchange rates using high frequency data. Following Huang and Tauchen (2005) and Barndorff-Nielsen and Shephard, 2004 and Barndorff-Nielsen and Shephard, 2006, we use bi-power variation to decompose daily realized volatility into two components: the smooth persistent and the discontinuous jump components. We model exchange rate returns, the different components of realized volatility and the central bank intervention using a system of simultaneous equations. We find strong support that interventions by Bank of Japan had increased both the continuous and the jump components of daily realized volatility. This suggests that the interventions by Bank of Japan had increased market volatility which not only caused short-lived positive jumps, but were also persistent over time. We did not find any evidence that interventions were effective in influencing the exchange rate returns for the entire sample period.

The effect of foreign exchange intervention on exchange rates has been a constant topic of discussion in the academic and policy circle ever since the collapse of the Bretton-Woods system in the early 1970s. Despite the move to floating exchange rates, central banks of several countries have intervened heavily in the foreign exchange (FX hereafter) market to manipulate their nominal exchange rates and ‘calm’ disorderly markets.1 The Bank of Japan (BOJ hereafter) on behalf of the Ministry of Finance carried out extensive interventions in the FX market in efforts to reduce the value of the yen. During the period of April 1991 and August 2006, the total amount of interventions conducted by BOJ was about 68 trillion yen (approximately 600 billion U.S. dollars).2 These actions on the part of the Japanese monetary authorities are understandable given the role of the export sector in their economic recovery. Had the BOJ been effective in its intervention operations? Had the BOJ been successful in depreciating the yen and reducing the volatility of the yen? Given the significance of understanding how central bank interventions (CBIs hereafter) affect the FX markets, it is important to critically examine the answers to these questions. Several authors have analyzed the effects of CBI on the FX market by looking at the impact on both the level and the volatility of exchange rate. In general, the literature is inconclusive about the impact of CBI on exchange rate returns. For example, Humpage (1988) and Baillie and Humpage (1992) have found that intervention was ineffective in influencing the level of exchange rate. Baillie and Osterberg (1997) finds that the effect of CBI on spot exchange rate returns are counterproductive, i.e. purchase of US dollars leads to a depreciation of the US dollar.3 This result holds for both unilateral and coordinated interventions. Others like Dominguez and Frankel (1993), Fatum and Hutchison (2005), Dominguez, 2003 and Humpage, 2003, and Ito (2003) conclude that CBI had a significant impact on the exchange rate, at least in the very short run, when it was publicly announced, coordinated, large, and infrequent. The studies looking at the effect of interventions on the volatility of exchange rates are more conclusive. Most studies, employing different measures of volatility, conclude that CBI tends to increase exchange rate volatility. For example, Bonser-Neal and Tanner (1996) and Dominguez (1998) used measures of implied volatility to find that CBI increases exchange rate volatility. Other studies like Dominguez (1998) and Beine et al. (2002) using GARCH-type models, and Beine et al., 2009 and Dominguez, 2006 using realized volatility models, arrive at the same conclusion. This finding is contrary to the aim of the central bank which intervenes to counter disorderly FX markets4. However, there are some studies that either do not find any impact of CBI on exchange rate volatility (Galati, Melick, & Micu, 2005) or find that CBI is associated with less exchange rate volatility at least for parts of the sample period (Hillebrand, Schnabl, & Ulu, 2009).5 In this paper, we seek to further advance our understanding of the impact of CBI on the two different components of exchange rate volatility – the ‘continuous’ persistent part and the discontinuous ‘jump’ component. To the best of our knowledge, no previous study, with the exception of Beine, Lahaye, Laurent, Neely, and Palm (2007), has analyzed the relation between CBI and the volatility components. Beine et al. (2007) had captured the long memory in the volatility process with an ARFIMA specification in the spirit of Andersen, Bollerslev, Diebold, and Labys (1999). The authors, however, have not addressed the the problem of endogeneity of intervention and exchange rates which is a key issue in these studies.6 We have modelled the different components of exchange rate volatility and intervention in a simultaneous equation framework, explicitly accounting for the endogeneity in the coefficient on contemporaneous interventions. The empirical literature examining the effect of CBI on exchange rate volatilities have mostly modeled volatility in the framework of GARCH-type models. However, recent developments in econometric methodology and the increasing availability of high-frequency data have shifted the paradigm from the discrete-time GARCH class of models to the non-parametric approach for modeling and forecasting time-varying daily market volatility. The empirical results in Andersen, Bollerslev, Diebold, and Labys (2003) strongly indicate that models of realized volatility outperform the popular GARCH-type and related stochastic volatility models in out-of-sample forecasting. Other studies such as Andersen and Bollerslev, 1998, Andersen et al., 2001a and Andersen et al., 2001b, and Barndorff-Nielsen and Shephard, 2004 and Barndorff-Nielsen and Shephard, 2006 have shown the importance of explicitly allowing for jumps, or discontinuities, in the estimation of continuous time stochastic volatility models.7 In particular, it has been found that many (log) price processes are best described by a combination of a very slowly mean-reverting continuous sample path process and a discontinuous jump component. Thus it is important to distinguish the jump from the non-jump movements. One advantage of separating out the smooth and persistent volatility component and the much less persistent jump process is that it can describe the in-sample price (exchange rate) processes better and also provide out-of-sample forecasts accurately.8 Due to extreme market events or macro announcements, there might be presence of unusually large movements in the price processes relative to what continuous-time diffusive models in finance would suggest. Our approach to modelling exchange rate volatility builds directly on the theoretical results in Barndorff-Nielsen and Shephard, 2004 and Barndorff-Nielsen and Shephard, 2006 and Huang and Tauchen (2005). We decompose the daily realized volatility into a jump and a persistent process using bi-power variation as indicated by the authors. It has been shown that realized volatility is a consistent estimator for both, the integrated variance and the jumps, in the return process. We calculate the realized bi-power variation based on adjacent absolute intra-daily returns. The jump component of the realized volatility is consistently estimated by the difference between the realized volatility and bi-power variation. We examine the effect of BOJ's foreign exchange interventions on the volatility of USD/JPY and DEM(EUR)/JPY exchange rates using intraday quotes from April 1, 1991 to July 31, 2006. We present new evidence on the efficacy of central bank interventions on the different components of exchange rate volatility. Our study adds to the literature in the following two ways. First, we model and estimate the effect of CBI on the ‘continuous’ persistent and the discontinuous ‘jump’ components of daily realized volatility. Our measure of realized volatility is an ‘observed model-free’ variable rather than a ‘latent’ one as is often used in the stochastic volatility or GARCH-type models. Realized volatility, computed as the sum of the squared intraday returns, captures all the price (foreign exchange rate) movements within each day. Second, we tackle the problem of endogeneity by estimating the contemporaneous interactions between central bank interventions, exchange rate returns, and the continuous and jump volatility components within a simultaneous equation framework. We report the following findings. First, our testing reveals that interventions by BOJ were unsuccessful in stabilizing the daily realized market volatility. We show that both the continuous and discontinuous components of volatility increased due to CBI. These results are robust in the USD/JPY and DEM(EUR)/JPY markets. This suggests that the interventions by BOJ had increased market volatility which were not only short-lived but also persistent over time. We also look at coordinated interventions by BOJ with the Fed in the USD/JPY market. The results of such concerted efforts were still the same, i.e. it had a positive correlation with both the volatility components. We provide sub-sample analysis based on structural breaks identified from the literature. Our estimation results indicate that BOJ interventions were significant and positively correlated with the persistent volatility component in all the sub-periods. However, the effect on the jump component was insignificant for the first two sub-samples. This would suggest that the true transient component of the volatility were more significant after 1998 when the BOJ interventions were infrequent and large. This paper is organized as follows. The next section gives details for realized volatility decomposition. Section 3 describes the estimation strategy and data. Section 4 discusses our main findings. Concluding remarks are offered in Section 5.

We analyze the effectiveness of interventions by Bank of Japan on exchange rate returns and volatility in the USD/JPY and DEM(EUR)/JPY foreign exchange markets. We use realized volatility to measure the uncertainty of exchange rate movements because it is a model-free estimate and it provides an accurate proxy to the market volatility. We decompose the daily realized volatility into a persistent continuous component and a discontinuous jump component. We model exchange rate returns and the two components of realized volatility using a simultaneous equation model. Using this framework, we distinguish the effect of CBI on the different components of daily realized volatility that most of the previous studies using GARCH-type models have overlooked. One advantage of separating the smooth persistent volatility component and much less persistent jump process is that it can better describe in-sample price (exchange rate) processes and also provides out-of-sample forecast accuracy. We also address the issue of endogeneity by using a simultaneous equation framework. We find that intervention by Japanese monetary authorities were ineffective in influencing the exchange rate returns. The authorities were also unsuccessful in stabilizing the daily realized volatilities in the FX markets. Our results show that both the continuous and the jump components in the realized volatility increased substantially by the BOJ interventions. These results hold for both the USD/JPY and the DEM(EUR)/JPY series. The results are also robust to unilateral interventions by BOJ and coordinated interventions by BOJ and Fed. We also take into account the structural breaks in the USD/JPY series by differentiating between frequent and low interventions with infrequent and high interventions. We find that the effect on the persistent component of the realized volatility is positive and highly significant in all the three sub-samples. However, the effect of BOJ interventions on the jump component is only significant in the last sub-sample when interventions were infrequent and high. This is in contrast to some of the previous studies. The effect on daily exchange rate returns is less clear. In particular, when BOJ intervenes by selling or buying yen, there is insignificant impact on the USD/JPY exchange rate returns. This result holds for the coordinated interventions by BOJ and Fed in the USD/JPY market and unilateral intervention by BOJ in the DEM(EUR)/JPY market. In the sub-sample analysis, the result in only strongly negative for unilateral interventions by BOJ in the USD/JPY market, i.e. selling of Yen by BOJ appreciates the Yen. Overall, we do not find any evidence that interventions by BOJ are successful in stabilizing the exchange rates or influencing the returns in the proper direction. On the contrary, BOJ interventions are associated with increasing both the persistent and the jump components of daily realized volatility. Our future work is to model the relation between the volatility and central bank intervention using an extreme value theory, so that the estimation results are not subject to any scaling constraints. Another direction of research is to first uncover a few common factors that drive the joint dynamics of the level of exchange rate, its volatility components, and intervention in a state-space factor model.