Effect of foreign exchange interventions on volatility of dollar/yen exchange rate

• Název práce v češtině: Effect of foreign exchange interventions on volatility of dollar/yen exchange rate
• Název v anglickém jazyce: Effect of foreign exchange interventions on volatility of dollar/yen exchange rate
• Klíčová slova anglicky: foreign exchange rate, volatility, intervention, regime, GARCH model
• Akademický rok vypsání: 2015/2016
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: prof. Ing. Evžen Kočenda, M.A., Ph.D., DSc.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 15.06.2016
• Datum zadání: 15.06.2016
• Datum a čas obhajoby: 21.06.2017 08:30
• Místo konání obhajoby: Opletalova - Opletalova 26, O105, Opletalova - místn. č. 105
• Datum odevzdání elektronické podoby: 16.05.2017
• Datum proběhlé obhajoby: 21.06.2017
• Oponenti: prof. Ing. Oldřich Dědek, CSc.

Seznam odborné literatury

1. Shinji Takagi, 2015. Conquering the Fear of Freedom: Japanese Exchange Rate Policy Since 1945, 1st Edition ed., Oxford: Oxford University Press, 336.
2. Michael Frenkel, Christian Pierdzioch, Georg Stadtmann, 2004. Modeling the intensity of foreign exchange intervention activity. Economic Letters, 85(3), 347-351, December 2004.
3. Alain P. Chaboud and Owen F. Humpage, 2005. An Assessment of the Impact of Japanese Foreign Exchange Intervention: 1991-2004. International Finance Discussion Papers, Number 824, January 2005.
4. Eric Hillerbrand and Gunther Schnabl, 2006. A Structural Break in the Effects of Japanese Foreign Exchange Intervention on Yen/dollar Exchange Rate Volatility. European Central Bank, Working Paper Series, June 2006, No 650, 38 pages.
5. John Dukich, Kyung Yong Kim, and Huan-Hsun Lin, 2010. Modeling Exchange Rate using the GARCH Model.
6. Rasmus Fatum, 2009. Official Japanese Intervention in the JPY/USD Exchange Rate Market: Is It Effective, and through Which Channel Does It Work? Monetary and Economic Studies, Vol. 27, 75-98, 2009.
7. Georgios Chortareas, Ying Jiang, and John C. Nankervis, 2013. Volatility and Spillover Effects of Yen Interventions. Review of International Economics, 21(4), 671–689, 2013.

Předběžná náplň práce

After United States dollar and the euro, Japanese yen is the third largest currency traded in the foreign exchange market (FX market). It is also often described by traders as a safe haven currency.
Currency pair USD/JPY, in particular, is traded in the highest volume compared to other pairs coupled with yen. Cyclical appreciation in tandem with global economic recessions is, therefore, expected of yen. To that effect, suspicion of seasonality in the time series is a grounded assumption. But most importantly, exchange rate policies, over the last three decades, have impacted the yen volatility more than any other factor.
Three hypotheses are going to be studied regarding dollar/yen exchange rate volatility:
1. There are opposite effects of the BoJ’s interventions on the USD/JPY exchange rate volatility during the studying period from 1991 to 2011. The volatility was increased by the interventions before the year 2000, but, on the contrary, the intervention policy effectively decreased the volatility in 2000-2010th.
2. The Japanese foreign exchange interventions have a short lived impact horizon. The life span of intervention shock is intraday.
3. Large lot interventions of high frequency have more stabilizing power factor than large lot interventions of low frequency in the short run.
As the topic is mostly related to the time series it would be appropriate to use GARCH model in order to test hypothesis listed above.
To test for the influence of the foreign exchange interventions on the USD/JPY exchange rate a GARCH-in-mean model is used. There will be a comparison of estimations from four different data samples according to the intervention regimes employed respectively by the Bank of Japan.
Three different intervention regimes are observed during the studied period started in 1991 and ended in 2016 and there are two „dividing points“ – 1995 and 2004. GARCH-in-mean model estimations obtained from three separated ranges of the time series as well as the fourth data subsample for the period from 2004 until 2011 would provide the one with nuances of every different regime and answer two questions – if the time horizon of the Japan FX intervention is short run and what type of intervention policy is the most effective one regarding the effect on the level of the exchange rate as well as reducing its volatility.
There are two main sources of data which are going to be used in the study: the USD/JPY exchange rate are closing spot prices by Investing.com and foreign exchange intervention operations by Ministry of Finance Japan.
As it can be seen from the current economic environment it is crucial for governments as well as central banks to manage currency in a careful and safe manner. One of the most recent papers on the topic is dated back to year 2011, although MoF of Japan has conducted a number of interventions since that time, but those interventions were excluded from the sample due to the fact that they were conducted after the financial crisis 2008-2009. In this study all the available information about the Japanese FX interventions is included into the data sample. The possible contribution of the study can be that it would help to evaluate the effectiveness of different types of intervention regimes according to the target of BoJ and, what is more important, choose the most appropriate one in the current economic environment.

Předběžná náplň práce v anglickém jazyce

After United States dollar and the euro, Japanese yen is the third largest currency traded in the foreign exchange market (FX market). It is also often described by traders as a safe haven currency.
Currency pair USD/JPY, in particular, is traded in the highest volume compared to other pairs coupled with yen. Cyclical appreciation in tandem with global economic recessions is, therefore, expected of yen. To that effect, suspicion of seasonality in the time series is a grounded assumption. But most importantly, exchange rate policies, over the last three decades, have impacted the yen volatility more than any other factor.
Three hypotheses are going to be studied regarding dollar/yen exchange rate volatility:
1. There are opposite effects of the BoJ’s interventions on the USD/JPY exchange rate volatility during the studying period from 1991 to 2011. The volatility was increased by the interventions before the year 2000, but, on the contrary, the intervention policy effectively decreased the volatility in 2000-2010th.
2. The Japanese foreign exchange interventions have a short lived impact horizon. The life span of intervention shock is intraday.
3. Large lot interventions of high frequency have more stabilizing power factor than large lot interventions of low frequency in the short run.
As the topic is mostly related to the time series it would be appropriate to use GARCH model in order to test hypothesis listed above.
To test for the influence of the foreign exchange interventions on the USD/JPY exchange rate a GARCH-in-mean model is used. There will be a comparison of estimations from four different data samples according to the intervention regimes employed respectively by the Bank of Japan.
Three different intervention regimes are observed during the studied period started in 1991 and ended in 2016 and there are two „dividing points“ – 1995 and 2004. GARCH-in-mean model estimations obtained from three separated ranges of the time series as well as the fourth data subsample for the period from 2004 until 2011 would provide the one with nuances of every different regime and answer two questions – if the time horizon of the Japan FX intervention is short run and what type of intervention policy is the most effective one regarding the effect on the level of the exchange rate as well as reducing its volatility.
There are two main sources of data which are going to be used in the study: the USD/JPY exchange rate are closing spot prices by Investing.com and foreign exchange intervention operations by Ministry of Finance Japan.
As it can be seen from the current economic environment it is crucial for governments as well as central banks to manage currency in a careful and safe manner. One of the most recent papers on the topic is dated back to year 2011, although MoF of Japan has conducted a number of interventions since that time, but those interventions were excluded from the sample due to the fact that they were conducted after the financial crisis 2008-2009. In this study all the available information about the Japanese FX interventions is included into the data sample. The possible contribution of the study can be that it would help to evaluate the effectiveness of different types of intervention regimes according to the target of BoJ and, what is more important, choose the most appropriate one in the current economic environment.