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Central bank intervention and the volatility of foreign exchange rates: evidence from the options market
This paper tests the effects of central bank intervention on the ex ante volatility of $/DM and $/Yen exchange rates. In contrast to previous research which employed GARCH estimates of conditional volatility, we estimate ex ante volatility using the implied volatilities of currency options prices. We also control for the effects of other macroeconomic announcements. We find little support for the hypothesis that central bank intervention decreased expected exchange rate volatility between 1985 and 1991. Federal Reserve intervention was generally associated with a positive change in exante ...