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Working Paper

Intervention and the Foreign Exchange Risk Premium: An Empirical Investigation of Daily Effects

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Currency markets have witnessed a sharp increase in government intervention since 1985. Many observers believe that this intervention promoted the dollar’s depreciation between 1985 and early 1987, and that intervention has since helped to stabilize dollar exchange rates. This paper tests for a systematic effect of daily dollar intervention on exchange rate risk premia. We test for both portfolio balance effects and signaling influences by using daily data on central bank intervention (in dollars) against both the yen and the West German mark. Following work by Dominguez (1989) and Loopesko (1984), we measure the daily risk premium in terms of the deviation from uncovered interest parity. However, we follow other empirical analyses of exchange rates and allow for generalized conditional autoregressive heteroscedasticity (GARCH). Some evidence is found for both the portfolio balance and signaling channels.
08.01.1990ISSN 2573-7953 WP 90-09DOI 10.26509/frbc-wp-199009

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Humpage, Owen F., and William P. Osterberg. 1990. “Intervention and the Foreign Exchange Risk Premium: An Empirical Investigation of Daily Effects.” Federal Reserve Bank of Cleveland, Working Paper No. 90-09. https://doi.org/10.26509/frbc-wp-199009