Abstract
AbstractThis paper uses a new data set, based on Reuters news articles, to captureintervention that is perceived by FX traders and probability density functions(PDFs) estimated from option data to describe market expectations. We find that,between September 1993 and April 1996, traders viewed the Bank of Japan asresponding mainly to deviations of the exchange rate from what they considered tobe some implicit target levels. On the other hand, the Federal Reserve was viewedto have mainly intervened when market conditions seemed most conducive to asuccessful intervention. We find that perceived intervention had no statisticallysignificant effect on the exchange rate level and on the skewness of the PDFs. Wealso present evidence that, on average, perceived intervention increased traders’uncertainty about future exchange rate movements. * Gabriele Galati is with the Bank for International Settlements and William Melick with Kenyon College, Ohio.We wish to thank Adrian Coghlan for helping to build the data set on intervention from Reuters articles, Florence Berangerfor excellent research assistance, Kevin Chang, Rasmus Fatum, Frank Smets and seminar participants at the BIS and the ECBfor helpful comments, Tomislav Minic for editorial suggestions and Stephan Arthur for overseeing the publication.
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