CENTRAL BANK INTERVENTION AND RISK IN THE FORWARD MARKET

A two country inter-temporal asset pricing model is developed which im plies that central bank foreign exchange intervention affects the forw ard exchange risk premium. The model is estimated from daily foreign e xchange intervention data for the US, German and Japanese central bank s. Considerable empirical support is found for the theoretical model w ith intervention influencing the risk premium in the forward market. P urchases of dollars by the Federal Reserve Bank are found to be associ ated with excess $ denominated returns. There is evidence that interve ntion has increased rather than reduced exchange rate volatility.