The impact of federal reserve intervention on exchange rate volatility: evidence from the futures markets

Abstract

The collapse of Bretton Woods or the fixed exchange rate system in 1973, along with the coinciding growth in global trade, and greater mobility of capital have all contributed to an increase in exchange rate volatility. Concerns about exchange rate levels and volatility have prompted central banks to actively intervene in foreign currency markets from time to time. This paper presents an empirical investigation of the relationship between central bank intervention actions and currency volatility. This paper is distinguished from earlier studies by employing expectation-based information contained in the currency futures prices to estimate conditional volatility in the USUS$/DM and US$/¥ returns, and by incorporating the simultaneity of the relationship between the Fed's intervention operation and exchange rate volatility into the model. Results suggest a lack of relationship between Fed's intervention activity and the US$/DM conditional volatility during the 1985–1993 period. However, Fed intervention is ...