Automating exchange rate target zones: intervention via an electronic limit order book

Arbeitspapier

This paper describes and analyzes automated intervention of a target zone. Unusually detailed information about the order book allows studying intervention effects in a microstructure approach. We find in our sample that intervention increases exchange rate volatility (and spread) for the next minutes but that intervention days show a lower degree of volatility (and spread) than non-intervention days. We also show for intraday data that the price impact of interbank order flow is smaller on intervention days than on non-intervention days. Finally, we reveal that informed banks take different positions than uninformed banks as they tend to trade against the central bank - which reflects a rational stance. Despite this position taking, the targeted exchange rate range holds and volatility, spread and price impact go down. Overall, the credible expression of an intervention band seems to achieve the desired effects of a target zone.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 2221

Classification and Topics

• Classification: Wirtschaft ; Foreign Exchange
• Subject: foreign exchange ; microstructure ; intervention ; exchange rate ; Wechselkurspolitik ; Börsen-Informationssystem ; Wechselkurs ; Volatilität ; Mikrostrukturanalyse ; Russland

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Melvin, Michael ; Menkhoff, Lukas ; Schmeling, Maik
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2008

Further information

• Handle: http://hdl.handle.net/10419/26266
• Last update: 10.03.2025, 11:45 AM CET