The Effectiveness of Exchange Rate Intervention: An Empirical Study Using Tick Data

ABSTRACT

Opinion is divided on the effectiveness of public intervention into foreign exchange markets. While some say that the effects of intervention are insignificant due to the smallness of the intervention sums in comparison to the vastness of the market, others maintain that interventions can be effective simply as a type of announcement of future financial policy; i.e., in its signaling effect. While a consensus on the question of intervention effectiveness fails to be reached, large discrepancies have emerged among countries in the degree to which they utilize intervention as a policy instrument. Among the developed countries, Japan's high frequency of intervention stands out sharply.

This report analyzes the effects of intervention using both the public data on interventions provided by the Ministry of Finance - the date and amount of the 174 interventions (buying dollars and selling yen) between May of 1991 and September 2001 - and tick data, which is a record of the price after each individual market exchange.

It was confirmed that a large-scale intervention (600 billion yen or more in one day) turns a rising trend of an average of one yen per day into a declining trend of about one yen per day, and also causes a rise in exchange rate volatility that lasts for three to four hours.

With small-scale interventions (below 200 billion yen in one day), on the other hand, there were no changes in the exchange rate that stood out in comparison to other non-intervention days. It was confirmed, however, that small-scale interventions, despite their size, did in fact have a significant effect upon the exchange rate if they were done continuously for several days.

The fact that the exchange rate market is significantly affected by large-scale interventions and continuous small-scale interventions indicates that the effects of intervention are not linear, and thus implies the possibility that the effectiveness of intervention is achieved primarily through its signaling effect.