Do jumps mislead the FX market?

J.-Y. Gnabo, J. Lahaye, S.F.J.A. Laurent, C. Lecourt

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

This paper investigates the link between jumps in the exchange rate process and rumours of central bank interventions. Using the case of Japan, we analyse specifically whether jumps trigger false reports of intervention (i.e. an intervention is reported when it did not occur). Intraday jumps are extracted using a non-parametric technique recently proposed by Lee and Mykland in 2008 and by Andersen et al. in 2007, and later modified by Boudt et al. in 2011. Rumours are identified by using a unique database of Reuters and Dow Jones newswires. Our results suggest that a significant number of jumps on the YEN/USD have been falsely interpreted by the market as being the result of a central bank intervention. The paper has policy implications in terms of central bank interventions. We show that in times where the central bank is known to intervene, some investors may attach a lot of weight to central bank interventions as a source of exchange rate movement, leading to a false 'intervention explanation' for observed jumps.

Original languageEnglish
Pages (from-to)1521-1532
Number of pages12
JournalQuantitative Finance
Volume12
Issue number10
DOIs
Publication statusPublished - 1 Jan 2012

Keywords

  • Central banks
  • FX interventions
  • Jumps
  • Rumours
  • Volatility
  • CENTRAL BANK INTERVENTION
  • FOREIGN-EXCHANGE INTERVENTION
  • FINANCIAL-MARKETS
  • RATE VOLATILITY
  • HIGH-FREQUENCY
  • RATES
  • NEWS

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