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 an te volatility of $/DM and $/yen exchange rates between 1985 and 1991. In contrast to previous research which employed GARCH estimates of con ditional volatility, we estimate ex ante volatility using the implied volatilities of currency option prices. We also control for the effect s of other macroeconomic announcements. We find little support for the hypothesis that central bank intervention decreases expected exchange rate volatility. Instead, central bank intervention is generally asso ciated with a positive change in ex ante exchange rate volatility, or with no change. (JEL 31). Copyright (C) 1996 Elsevier Science Ltd.