Central Bank Intervention and Risk Premia in Foreign Exchange Markets: Evidence of Daily Effects: Switzerland 1986–1995

Abstract

Since the Plaza Meeting in September 1985, G-10 central banks have intervened in foreign exchange markets in a manner and scale unprecedented in the post Bretton Woods era. Using o cial daily data on interventions by the Swiss National Bank, this paper evaluates the e ectiveness of these interventions and examines their impact on exchange rate risk premia, as defined by deviations from interest rate parity. My results suggests that intervention (via its e ect on the risk premium) may be responsible for the frequently observed failure of foreign exchange market e ciency models and for their poor out-ofsample forecasting performance